Group Half-Yearly Financial Report 2016 seeking a second party opinion. What exactly is this? PK: A...

Group Half-Yearly Financial Report 2016

Contents

2

1

4

2

5

3Board of Management 12

Foreword 14

The Board of Management 16

BayernLB Group –

the first half of 2016 at a glance 4

Group interim management report 18

Overview of the

BayernLB Group 20

Report on the economic

position 21

Report on expected

developments and on

opportunities and risks 30

Selected business highlights

in the first half of 2016 6

Consolidated half-yearly financial

statements 62

Statement of comprehensive

income 64

Balance sheet 66

Statement of changes in equity 68

Cash flow statement 70

Notes 71

Responsibility statement by the

Board of Management 107

Review Report 108

3

BayernLB Group – the first half of 2016 at a glance

Income statement (IFRS)

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015 Change in %/pp

Net interest income 728 824 – 11.6

Risk provisions in the credit business – 4 13 –

Net interest income after risk provisions 724 837 – 13.5

Net commission income 119 110 8.7

Gains or losses on fair value measurement 13 – 52 –

Gains or losses on hedge accounting – 28 – 5 >100

Gains or losses on financial investments 216 207 4.2

Administrative expenses – 578 – 560 3.2

Expenses for the bank levy

and deposit guarantee scheme – 93 – 147 – 36.6

Other income and expenses 44 44 – 0.8

Gains or losses on restructuring – 9 – 2 >100

Profit/loss before taxes 409 433 – 5.5

Cost/income ratio (CIR) 52.9% 49.6% 3.3 pp1

Return on equity (RoE) 9.3% 9.0% 0.3 pp1

Quarterly comparisonThe table below compares performance in the first and second quarters of 2016:

EUR million Q2 2016 Q1 2016 Change in %

Net interest income 356 372 – 4.2

Risk provisions in the credit business – 19 15 –

Net interest income after risk provisions 337 387 – 12.9

Net commission income 61 58 6.9

Gains or losses on fair value measurement 35 – 22 –

Gains or losses on hedge accounting – 22 – 6 >100

Gains or losses on financial investments 172 44 >100

Administrative expenses – 277 – 301 – 8.1


and deposit guarantee scheme – 17 – 76 – 76.8

Other income and expenses 36 8 >100

Gains or losses on restructuring – 8 – 1 >100

Profit/loss before taxes 318 91 >100

Rounding differences may occur in the tables.

BayernLB . Group Half-Yearly Financial Report 20164

Balance sheet (IFRS)

EUR million 30 Jun 2016 31 Dec 2015 Change in %

Total assets 224,296 215,713 4.0

Business volume 261,217 252,468 3.5

Credit volume 180,745 175,428 3.0

Total deposits 149,665 146,390 2.2

Securitised liabilities 40,164 34,840 15.3

Subordinated capital 3,862 4,719 – 18.2

Equity 10,893 11,070 – 1.6

Banking supervisory capital and ratios under CRR/CRD IV

EUR million 30 Jun 2016 31 Dec 2015 Change in %

Common Equity Tier 1 capital (CET1 capital) 8,709 10,537 – 17.3

Own funds 10,589 12,214 – 13.3

Total RWA 68,400 69,606 – 1.7

Common Equity Tier 1 ratio (CET1 ratio) 12.7% 15.1% – 2.4 pp1

CET1 ratio (fully loaded) 11.3% 12.0% – 0.7 pp1

Total capital ratio 15.5% 17.6% – 2.1 pp1

Employees

30 Jun 2016 31 Dec 2015 Change in %

Number of employees 7,030 7,082 – 0.7

Current ratings

Long-term Short-term Pfandbriefs2

Fitch Ratings A - F1 AAA

Moody’s Investors Service A2 P-1 Aaa

1 Percentage points.

2 Applies to public Pfandbriefs and mortgage Pfandbriefs.

BayernLB Group – the first half of 2016 at a glance

BayernLB . Group Half-Yearly Financial Report 2016 5

Selected business highlights in the first half of 2016

Strong partners

On one side, large German corporates and SMEs, the best in their sectors and famous worldwide , along with financial institutions and nearly every savings bank in Germany. On the other side, BayernLB, one of the leading commercial banks in Germany, based in one of Europe’s most dynamic economic regions. Put the two sides together and you not only have a mutually bene-ficial relationship, but you also create long-term partnerships nourished by trust and deep understanding of your customers’ business. Below is a selection of the latest deals we have done together.Something new this time is Green Bonds and Green Schuldschein notes. These financial instru-ments are new to the market but are experiencing a real boom. Therefore we’ll be talking more about them on the next few pages.

2016

Möbelcenter biller GmbH,

Eching

EUR 26 millionBookrunner, Mandated Lead

Arranger, AgentSyndicated loan

2016

Care Center

Fürth

EUR 25 millionConstruction finance for a new

retirement/nursing home in Fürth, operator Curanum AG

2016

Schwabinger Carré II – Munich

EUR 80 millionProject and long-term portfolio

financing for a residential property in cooperation with the

Versicherungskammer Bayern

2016

A94 – Isentalautobahn

Germany

EUR 410 millionMandated Lead Arranger,

AgentMotorway PPP

January 2016

NRW.Bank

EUR 750 million0.125% January 2021 Joint Lead Manager

Bond

2016

Geothermie Holzkirchen

EUR 13.4 millionSyndicated loan

Agent

March 2016

Grenke Finance Plc

EUR 125 million1.50% April 2021

Joint Lead Arranger Bond

20

16

6 BayernLB . Group Half-Yearly Financial Report 2016

March 2016

Crédit Agricole Home Loan SFH

EUR 1.5/1.75 billion 1.250% March 2031 /

0.375% March 2023Joint Lead Manager

Covered bond

May 2016

LafargeHolcim

EUR 1 billionTerms of 5/7/10 years Joint Lead Arranger

Schuldschein note loan

2016

TS Paris Bourse – Paris

EUR 75 millionParticipation in portfolio

financing totalling EUR 220 million

Lead Arranger Natixis Bank

2016

Holzkontor Ostbahnhof

München

Development of a residential property and

project development of an office property

2016

La Tête

Düsseldorf

Financing for project development of the

multi-tenant office building on Toulouser Allee

2016

FUNKE MEDIENGRUPPE

EUR 830 millionMandated Lead Arranger

CtoC transaction

2016

VTG Aktiengesellschaft,

Hamburg

GBP 15 millionParallel lender

Operating lease of container and cement freight wagons

2016

Caddington, Hall Farm, Sowerby

Lodge, Tonedale Farm

UK

GBP 20 millionMandated Lead Arranger

PV plants

2016

Südwolle Group,

Nuremberg

EUR 10 millionCtoC acquisition financing

2016

S-Plafond-Beteiligung

EUR 4.2 millionSyndicated loan with Sparkasse

Memmingen- Lindau-MindelheimReal estate sector

2016

Messe München

EUR 43.85 millionSyndicated loan

Agent

April 2016

pbb Deutsche Pfandbriefbank

EUR 500 million1.125% April 2020

Joint Lead Manager Senior unsecured bond

7BayernLB . Group Half-Yearly Financial Report 2016

Green financing instruments:

“Credibility is a key factor for success”

Green Bonds are mainly used to

finance environmental and climate

protection projects. The market

is still young – but booming.

Jan Stechele, Head of Strategic

Marketing and responsible for

sustaina bility management at

BayernLB, and Paul Kuhn, Head of

DCM Origination Corporates, talk

about what makes financial instru-

ments green and how to ensure

the quality of Green Bonds (a term

to which no one as yet holds the

copyright).

There has been an increasing

amount of talk about Green

Bonds over the last three years.

What is it that makes them

green?

PK: As with

other bonds,

the funds

are raised

on capital

markets, but

it’s the use to

which they

are put that makes them green.

They finance environmental and

climate protection projects, such

as building wind farms and solar

energy plants or making buildings

more energy-efficient.

JS: Green

Bonds are

helping to

finance the

restructuring

of our energy

supply. If we

are to achieve

the objective agreed at the Paris

Climate Change Conference of lim-

iting global warming to two

degrees Celsius, a great deal of

money will have to be invested in

energy supply and efficiency. The

International Energy Agency (IEA)

estimates that almost USD 50 bil-

lion of financing will be needed

over the next 20 years.

Who issues these bonds?

PK: The European Investment Bank

issued the first Green Bond in

2007, then other supranationals

like the World Bank and the IFC

followed suit. Even KfW (the Ger-

man development bank) has issued

several Green Bonds in the past


few years. Corporates have been

active issuers of Green Bonds

too, leading to a sharp rise in

both the number of Green Bonds

and the volume of issues. Last

year saw a record for new issues:

USD 42 billion. We are expecting

USD 65 – 70 billion this year. We

are increasingly seeing other forms

of green securities being issued in

the market, alongside traditional

bonds. Earlier this year BayernLB

was involved in the issue of the

world’s first green Schuldschein

note loans by Friesland Campina, a

Dutch dairy, and Nordex, and green

Pfandbriefs are also available.

Which investors do Green Bonds

appeal to?

PK: Green Bonds are basically

structured just like normal bonds.

The coupon mainly depends on

the issuer’s rating, and there is

generally no premium or discount

on the yield for the green compo-

nent. So the bonds are suitable for

all investors. But we see particular

interest from investors who follow

social and environmental criteria.

For the Green Bond from DKB, for

example, more than 30 percent of

investors came from the sustaina-

ble sector. Green Bonds tend to be

aimed more at institutional inves-

tors, as they often trade in units

of EUR 100,000. But the first Green

Bond funds are already available

in the market, providing access for

retail investors.

“Greenwashing” is something

that investors are very sensitive

about, and not just sustainable

ones. How can they be sure their

capital is genuinely being

invested in green projects?

JS: In my opinion, credibility is a

key factor for success in the devel-

opment of this market. No one has

a copyright on the term “Green

Bond”, so every issuer is at liberty

June 2016

Senior Unsecured

DKB

EUR 500 million0.625 % June 2021Joint Lead Manager

Sustainability/Green Bond

March 2016

State of

North Rhine-Westphalia

EUR 1.585 billion0.125 % March 2023Joint Lead Manager

Sustainability/Green Bond

April 2016

Koninklijke

FrieslandCampina N.V.

EUR 300mTenor 5 / 7 / 8.5 / 10 years

Joint Lead ArrangerGreen Schuldschein note loan

April 2016

Nordex SE

EUR 550mTenor 3 / 5 / 7 / 10 years

Joint Lead ArrangerGreen Schuldschein note loan


to market their bond under the

label. Banks, investors, environ-

mental organisations and Green

Bond issuers have got together to

draw up standards on structuring

to protect the Green Bond brand.

The outcome has been the Green

Bond Principles. These set out

the main points for using and

managing the proceeds from issu-

ing Green Bonds, and for regular

reporting on the projects financed.

Similar standards were also pub-

lished in June this year for social

bonds. These are used to finance

social projects such as building

housing, schools and hospitals.

The Green Bond Principles

recommend seeking a second

party opinion. What exactly

is this?

PK: A Second Party Opinion or SPO

is a certification from an independ-

ent party confirming that the issu-

ers comply with the Green Bond

Principles and only select projects

for financing that have a demon-

strable environmental or social

benefit. Last year these reports

were produced for around half

of all Green Bonds issued, often

by independent sustaina bility

rating agencies like oekom

research and Sustainalytics.

We would like issuers to make

greater use of them, in the inter-

ests of the quality and credibility

of Green Bonds.

JS: How rigorously an SPO tackles

the challenges of sustainable

development is also a key factor.

There is a very lively discussion in

the market about whether a com-

pany with low environmental and

social standards can issue a Green

Bond with any credibility at all.

How do you answer the question

for BayernLB?

JS: BayernLB operates in the Green

Bond market in two ways. Firstly

we work with issuers, structuring

and placing Green Bonds in the

market. Secondly, as mentioned,

DKB successfully launched a Green

Bond for EUR 500 million, which is

being used to fund loans for wind

and solar power in Germany. It

is very important for us that


these activities are part of a

comprehensive sustainability con-

cept. The very positive feedback

we have received on the quality of

our sustainability management

shows we have a solid position

here. The BayernLB Group, DKB

and BayernLabo have all been

awarded the prestigious “Prime

Status” by sustainability agency

oekom research. In the latest sec-

tor ratings, DKB and BayernLabo

achieved the highest marks glob-

ally. The award is given to compa-

nies that meet the agency’s strict

standards for compliance with

social and environmental stand-

ards in all areas of banking.

What can we expect from Green

Bonds in the future?

PK: We see several trends that

could further push up the volume of

issues over the coming months and

years. Firstly, it is clear that new

issuers will enter the market; com-

panies from other industries, for

instance. So far, issuers have mainly

been electricity companies, but now

we are seeing the first Green Bonds

from the auto sector and the com-

puter industry. Another example is

the sustainability bond issued by

the State of North Rhine-West-

phalia, which BayernLB helped place

in March this year. Secondly, the

subject is gaining importance in

markets outside Europe, such as

Asia. At the same time, the range of

projects being financed is broaden-

ing out. This gives investors the

ability to diversify across several

different investment themes.

We will also see an even greater

range of financing instruments. We

assume, for example, that there will

be a further increase in the supply

of Schuldschein note loans.

JS: With these dynamic trends, it

will be a challenge to ensure the

quality of Green Bonds. This is

where the Green Bond Principles

and SPOs have an important part

to play. BayernLB will do its part to

contribute to further developing

this cornerstone for the credibility

of Green Bonds.

Many thanks for your time.


Board of Management

12

14 Foreword

16 The Board of Management

13

Dear customers and business partners,

ladies and gentlemen,

BayernLB’s earnings for the first half of the year were good once again with profit before taxes

of EUR 409 million in the first six months of 2016. This means that earnings were in line with the

year-before period (EUR 433 million). In a challenging market environment characterised by low

interest rates, expensive regulation, financial market volatility and intense competition, these

pleasing results demonstrate the strength of our customer business.

Strength which also meets with a positive reception from the rating agencies. As a result,

Moody’s raised our long-term issuer rating to A2 at the beginning of the year. In May, Fitch even

upgraded its standalone rating (viability rating) for BayernLB by two notches to bbb. Not only

do these rating upgrades provide a strong boost to BayernLB’s image as a long-term partner

with good credit quality, they also benefit the Bank financially by opening up broader business

opportunities and making it more competitive as a result of improved funding conditions.

BayernLB’s solidity was further confirmed by the bank stress test by the European Banking

Authority (EBA) in July. Even under the stress scenario and the strict “fully-loaded” criteria, which

simulates the impact of an economic and asset price shock on European banks, BayernLB’s capital

adequacy remained absolutely sound thanks to its good portfolio quality. At the end of the first

half, our Common Equity Tier 1 (CET1) ratio was a robust 12.7 percent.

Our sustained efficiency improvements enabled us to repay a further EUR 1.3 billion in silent

partner contributions to the Free State of Bavaria in April this year. Over the past few years,

BayernLB has returned nearly EUR 4.4 billion to the Free State of Bavaria, of which around

EUR 4.0 billion counts towards the state aid repayment requirement. We will continue to make

every effort to repay the final outstanding amount of EUR 1 billion.

Foreword


Improving our cost structure and optimising our capital base remain ongoing tasks which the

entire banking sector needs to address. At the same time, we will continue to invest specifically

in our IT platform to make processes more efficient and allow us to offer our customers new

digital services. To this end we will make even greater use of the expertise within the Group at

our Deutsche Kreditbank (DKB) online banking subsidiary and adapt offerings from the retail

customer sector for our business customers.

By aligning our entire organisation to the needs of our customers, we will continue to fulfil

our mission to be the strong Bavarian bank for the German economy. On behalf of my Board of

Management colleagues and all the staff at BayernLB, I would like to thank you, our customers

and business partners, for the trust you have placed in us and look forward to continuing to work

with you in the future.

Sincerely,

Dr Johannes-Jörg Riegler

CEO



12 Board of Management

14 Foreword

The Board of ManagementAllocation of tasks

as at 17 August 2016

Dr Edgar ZollerDeputy CEO

Real Estate & Savings Banks/ Association Bayerische Landesbodenkredit anstalt

Marcus Kramer Member of the Board of Management CRO

Risk Office Restructuring Unit Group Compliance

Dr Markus Wiegelmann Member of the Board of Management CFO/COO

Financial Office Operating Office


Dr Johannes-Jörg Riegler CEO

Corporate CenterDeutsche Kreditbank AG

Michael BückerMember of the Board of Management

Corporates & Mittelstand

Ralf Woitschig Member of the Board of Management

Financial MarketsBayernInvest Kapitalverwaltungs-gesellschaft mbHReal I.S. AG Gesellschaft für Immobilien Assetmanagement



12 Board of Management

14 Foreword

Group interim management report

18

20 Overview of the BayernLB Group

21 Report on the economic position

30 Report on expected developments and on opportunities and risks


Overview of the BayernLB Group

Key changes in the scope of consolidation and the investment portfolio

In the first half of 2016 there were no material changes in the BayernLB Group’s scope of consoli-

dation or investment portfolio.

Please refer to the Group management report and financial statements for 2015 for information

on the business model, strategy and internal Group management system.


Report on the economic position

Macroeconomic environment

The German economy got off to a good start in 2016, growing by 0.7 percent in the first quarter

over the quarter before.1 Private consumption, buoyed by a strong labour market and higher real

wages, continues to drive the upswing. In addition, the economy got a short-term boost from

government spending on taking in the wave of refugees. Capital spending also grew in the first

quarter of 2016. This was supported by easy financing conditions, driven by the European Central

Bank’s expansive monetary policy and Germany’s safe haven status. The construction sector

continued to benefit from this as well, and also saw less of a slowdown than usual at the start

of the year due to an unusually warm winter. The labour market has continued to be strong.

Although the number of unemployed people from refugee countries is clearly rising, sufficient

new jobs are still being created to cut unemployment overall. The unemployment rate has fallen

to a historic low.2 Low unemployment has led to a shortage of labour in some sectors, putting

pressure on wages to rise. However, tame inflation is deterring employees from making high

wage demands, since even a modest increase in nominal wages is enough to boost real wages

when inflation is low. Although the impact of last year’s sharp drop in energy prices on the

annual inflation rate has tapered off, the headline inflation figure excluding energy remains well

below the ECB’s target of less than, but close to two percent.3 Foreign trade dragged on growth

at the start of the year in mathematical terms. This was not due to weakness in exports, though.

Rather, imports were up strongly indicating that the domestic economy is doing well. The UK

vote at the end of June to leave the EU (Brexit) has created a new situation fraught with uncer-

tainties.

In regard to monetary policy, the Fed held its fire by not raising rates again following its first hike

in December 2015. The ECB went further, deciding in March 2016 to loosen monetary policy even

more, and launched a programme to buy corporate bonds, in addition to cutting interest rates

and expanding the existing quantitative easing (QE) bond purchase programme. Even so, uncer-

tainty on financial markets remains high. In the first quarter the combination of weak economic

signals from China and the US, falling oil prices, worries about the stability of certain banks in the

US and Europe, along with falling inflationary expectations, triggered price turmoil around the

world resulting in another steep fall in yields. Over the first quarter the yield on 10-year Bunds

tumbled from around 0.6 percent to 0.15 percent4. In the second quarter the vote for Brexit

accelerated the decline in yields. At the end of June 2016 the yield on 10-year Bunds was negative.

Despite Brexit the euro appreciated in the first half, as the dollar was hurt by increasing uncer-

tainty surrounding the next rate hike from the Fed. Overall, the euro gained 2 percent against the

dollar to 1.11 at the midpoint of 2016. On equity markets, fear of a major slowdown in the global

economy and negative consequences from the collapse in oil prices between the start of the year

and mid-February caused share prices to fall sharply. As the signals emerging from the global

economy turned more positive again and the oil price recovered, the months that followed saw a

1 Bundesbank monthly report for May 2016.

2 Federal Employment Agency monthly report for June 2016.

3 Federal Statistical Office press release no. 197 dated 10 June 2016.

4 Bloomberg Markets 2015: “Germany Generic Govt 10Y Yield”, http://www.bloomberg.com/quote/GDBR10:IND.



18 Group interim management report

20 Overview of the BayernLB Group 21 Report on the economic position

recovery in stock markets until there was renewed turbulence following the Brexit vote. After a

volatile performance, trading in a range between 8,699 and 10,486 on an intraday basis, the DAX

closed the first half down 9.9 percent.5

Course of business

The BayernLB Group performed well in a challenging market environment, closing the first half of

2016 with a good profit before taxes of EUR 409 million (H1 2015: EUR 433 million).

This includes EUR 148 million from the sale of the stake in Visa Europe Ltd., London to Visa Inc.

of San Francisco. The previous-year figure included a substantial contribution from the sale of

securities. Consolidated net profit rose slightly to EUR 314 million (H1 2015: EUR 310 million).

Total assets as at 30 June 2016 were EUR 224.3 billion, up 4 percent from the end of FY 2015.

The lending business once again had a major impact on the Group’s assets.

The financial position was sound in the first six months of the year under review, and sufficient

liquidity was on hand at all times. The BayernLB Group continued to enjoy a stable economic

situation.

The BayernLB Group’s capital base remains solid. The Common Equity Tier 1 (CET1) ratio declined

to 12.7 percent (31 December 2015: 15.1 percent), largely because of the EUR 1.3 billion repayment

to the Free State of Bavaria of the silent partner contribution in April 2016. The “fully loaded”

CET1 ratio is 11.3 percent (31 December 2015: 12.0 percent).

Results of operations

Net interest income fell to EUR 728 million (H1 2015: EUR 824 million), primarily due to the even

lower level of interest rates and low demand for loans. Whereas net interest income rose slightly

at Deutsche Kreditbank AG, Berlin (DKB), it declined at BayernLB.

As a result of good portfolio quality and high releases, risk provisions in the credit business were

low at EUR – 4 million (H1 2015: EUR 13 million). The figure for the Group was once again well

below the forecast amount for the period.

The rise in net commission income to EUR 119 million (H1 2015: EUR 110 million) was a result of

the first-time consolidation of Bayern Card-Services GmbH – S-Finanzgruppe, Munich (BCS) at the

end of 2015.

Gains or losses on fair value measurement came in at EUR 13 million (H1 2015: EUR – 52 million).

Customer margins of EUR 51 million (H1 2015: EUR 61 million) and currency-related transactions

of EUR 14 million (H1 2015: EUR – 109 million) made a positive contribution. There was a negative

impact of EUR – 64 million (H1 2015: EUR 28 million) from fair value adjustments, partly the result

of the Brexit vote.

5 Thomson Reuters Datastream: “DAXINDX”


Gains or losses on financial investments amounted to EUR 216 million (H1 2015: EUR 207 million),

of which the Visa transaction accounted for EUR 142 million. Most of this income was recognised

by DKB. In addition, proceeds from the sale of securities and disposal of a shareholding once

again contributed to this item.

Administrative expenses rose slightly by 3.3 percent to EUR 578 million, partly as a result of the

first-time consolidation of BCS, which employs some 260 staff.

Expenses for the bank levy and deposit guarantee scheme comprised a total charge of

EUR 93 million (H1 2015: EUR 147 million). This included EUR 51 million for the bank levy

(H1 2015: EUR 99 million) and a EUR 42 million contribution to the Savings Banks Finance Group’s

deposit guarantee scheme (H1 2015: EUR 47 million).

Other income and expenses in the amount of EUR 44 million (H1 2015: EUR 44 million) included

income and expenses from the non-banking activities of the subsidiaries, tax reimbursements on

non-profit-related taxes and also interest income on tax reimbursements from previous years.

In accordance with the BayernLB Group’s management policy, starting in 2016 return on equity6

(RoE) will no longer be calculated based on the equity reported in the balance sheet but rather

equity calculated according to regulatory requirements. In the first half of 2016, RoE was

9.3 percent (H1 2015: 9.0 percent). The cost/income ratio7 (CIR) was 52.9 percent (H1 2016:

49.6 percent).

Further information on each item can be found in the notes.

Core and non-core business of the BayernLB Group

Since 2009, BayernLB has been consistently focusing on its forward-looking core business and

winding down all non-core activities, which were pooled into the Non-Core Unit for this purpose.

In the first half of 2016 the BayernLB Group posted profit before taxes of EUR 409 million

(H1 2015: EUR 433 million), nearly all of which (EUR 392 million) came from core business

(H1 2015: EUR 553 million). In view of the current economic situation, particularly the low interest

rates, and the EUR – 93 million of charges for the bank levy and the deposit guarantee scheme

(H1 2015: EUR – 147 million), earnings in the core business can once again be described as good.

The systematic winding down of non-core business continued in the first half of 2016. Risk-

weighted assets in the Non-Core Unit fell by another 32 percent from the end of 2015.

6 RoE = profit before taxes/average CET1.

7 CIR = administrative expenses/(net interest income + net commission income + gains or losses on fair value measure-

ment + gains or losses on hedge accounting + gains or losses on financial investments + other income and expenses).





1 Jan – 30 Jun 2016

Core business

(EUR million)

Share

(in percent)

Non-core

business

(EUR million)

Gross earnings8 1,056 96.7 36

Risk provisions – 19 – 15

Administrative expenses – 546 94.4 – 32

Expenses for the bank levy and

deposit guarantee scheme – 93 100.0 0

Gains or losses on restructuring – 7 81.8 – 2

Profit/loss before taxes 392 95.8 17

Risk-weighted assets 65,138 95.2 3,262

Segments

The segment report is based on the monthly internal management report to the Board of Manage-

ment and reflects the BayernLB Group’s six segments. As at 30 June 2016, BayernLB’s core busi-

ness was divided into the operating segments

• Corporates & Mittelstand

• Real Estate & Savings Banks/Association, including the legally dependent institution Bayerische

Landesbodenkreditanstalt, Munich (BayernLabo)

• DKB, with the core business activities of the Deutsche Kreditbank Aktiengesellschaft, Berlin

(DKB) sub-group and the consolidated subsidiary Bayern Card-Services GmbH – S-Finanzgruppe,

Munich (BCS)

• Financial Markets, including the subsidiaries Real I.S. AG Gesellschaft für Immobilien Asset-

management, Munich (Real I.S.) and BayernInvest Kapitalverwaltungsgesellschaft mbH, Munich

(BayernInvest)

Also allocated to the core business is the Central Areas & Others segment which includes the

consolidated subsidiary BayernLB Capital LLC I, Wilmington and the consolidation entries not

allocated to any other segment.

The Non-Core Unit primarily includes the Restructuring Unit, which holds portfolios of non-core

assets of BayernLB, the non-core activities of DKB, and other non-core activities such as the

consolidated subsidiary Banque LBLux S.A. in Liquidation, Luxembourg (LBLux i. L.) and the loans

to HETA (including their funding).

8 Gross earnings = net interest income + net commission income + gains or losses on fair value measurement +

gains or losses on hedge accounting + gains or losses on financial investments + other income and expenses.


The contributions of the individual segments to the profit before taxes of EUR 409 million

(H1 2015: EUR 433 million) are shown below:

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Corporates & Mittelstand 118 175

Real Estate & Savings Banks/Association 119 98

DKB 263 154

Financial Markets – 49 149

Central Areas & Others (including Consolidation) – 60 – 22

Non-Core Unit 17 – 121

Corporates & Mittelstand segment

• Operating earnings from net interest and net commission income stable

• Good earnings from customer business in Financial Markets products

• Prior-year period boosted by high recoveries on written down receivables

Profit before taxes in the Corporates & Mittelstand segment was EUR 118 million (H1 2015:

EUR 175 million), less than in the first half of 2015. Risk provisions were the main reason for the

decrease in profit before taxes. Although contributing EUR 22 million to earnings (H1 2015:

EUR 52 million), this was still well below their contribution in the prior-year period, when they

were boosted by significantly higher recoveries on written down receivables. Net interest and net

commission income held stable overall at EUR 201 million (H1 2015: EUR 210 million) despite a

lack of capital spending by customers and a competitive corporate banking market. As in the

previous year, earnings from customer business with Financial Markets products were pleasing,

however it was not possible to fully replicate the prior-year figure from gains or losses on fair

value measurement at EUR 24 million (H1 2015: EUR 30 million). Administrative expenses of

EUR – 131 million were higher than in the previous-year period (H1 2015: EUR – 119 million). In light

of the difficult market situation, the results were satisfactory overall in terms of both earnings and

new business.

Real Estate & Savings Banks/Association segment

• Earnings rise in the Real Estate division; new business continues to do well

• Low interest rates weigh on earnings in the Savings Banks/Association division

• Earnings at BayernLabo up sharply in a low interest rate environment thanks to higher net

interest income and mark-to-market gains

Profit before taxes in the Real Estate & Savings Banks/Association segment rose by more than

one-fifth to EUR 119 million (H1 2015: EUR 98 million).





The Real Estate division once again made a significant contribution to the segment’s earnings

with a profit before taxes of EUR 72 million (H1 2015: EUR 75 million). Gross earnings rose com-

pared to the first half of the previous year to EUR 93 million (H1 2015: EUR 87 million). This was

primarily thanks to the growth in new business resulting from continuing high customer demand.

The contribution to earnings from risk provisions was positive again at EUR 11 million EUR

(H1 2015: EUR 18 million).

The Savings Banks & Association division reported profit before taxes of EUR – 2 million, down on

the previous year figure of EUR 5 million. The loss mainly reflects the low level of interest rates

and resultant weak demand for capital market products.

At BayernLabo, profit before taxes rose sharply to EUR 49 million (H1 2015: EUR 16 million).

Although low interest rates continue to make life difficult for development banks, operating busi-

ness remained stable and net interest income rose to EUR 36 million (H1 2015: EUR 32 million).

The sharp rise in earnings resulted mainly from mark-to-market gains on derivative transactions

to hedge interest rate risk. This is reflected in the EUR 16 million of gains on fair value measure-

ment (H1 2015: EUR – 4 million) and the EUR 5 million (H1 2015: EUR – 2 million) in gains or losses

on hedge accounting.

DKB segment

• Good business performance continues, reflected particularly in strong net interest income once

again

• Sale of stake in Visa Europe Ltd., London pushes up profit before taxes by over EUR 100 million

from H1 2015

• The BCS subsidiary, consolidated since end-2015, contributed EUR 11 million to profit before

taxes

The DKB segment reported total profit before taxes of EUR 263 million (H1 2015: EUR 154 million).

In view of the current economic situation, DKB’s core business performed extremely well again in

the first half of 2016. The main contributor to the DKB unit’s sharp increase in profit before taxes

to EUR 252 million (H1 2015: EUR 154 million) was income of EUR 130 million from the sale of

the stake in Visa Europe Ltd., London to Visa Inc., San Francisco. Net interest income was on a par

with the previous-year period at EUR 386 million (H1 2015: EUR 387 million). Credit volume in the

infrastructure and corporate banking business was again higher. DKB also further strengthened

its position as Germany’s second-largest online bank thanks to continuing customer growth in its

retail business. Expenses for risk provisions at EUR – 52 million (H1 2015: EUR – 34 million) and

administrative expenses of EUR – 194 million (H1 2015: EUR – 180 million) were higher than in the

prior-year period. The charges for the bank levy and the deposit guarantee scheme came to a

total of EUR – 22 million (H1 2015: EUR – 9 million), also higher than in the previous year.

Consolidated since the end of 2015, the BCS subsidiary contributed EUR 11 million to profit

before taxes, also benefiting from the sale of an investment.


Financial Markets segment

• Sharp fall in earnings due to low interest rates and mark-to-market valuations on derivative

transactions

• Earnings from customer business slightly higher than the year-before period despite continuing

weak demand for capital market products

The Financial Markets segment posted a loss before taxes of EUR – 49 million in H1 2016

(H1 2015: profit of EUR 149 million). As usual, earnings from financial market products on behalf

of the customer-serving business segments were reported under those segments. Earnings from

business with customers were slightly higher than in the previous-year period despite continuing

weak demand for capital market products in the face of low interest rates. The sharp decline in

net interest income to EUR – 10 million (H1 2015: EUR 81 million) had a significant impact on the

segment’s earnings. The drop largely reflects the impact of low interest rates. Mark-to-market

valuations likewise had a similar impact on earnings. Fair value adjustments, largely in connec-

tion with increased market values of derivative transactions, resulted in a total charge of

EUR – 66 million (H1 2015: EUR 21 million). The first half of the previous year had seen gains

from releases of fair value adjustments. The year-before period also included high price gains

on securities.

The overall earnings contribution of the two consolidated subsidiaries was on par with the

first six months of 2015. BayernInvest and Real I.S. posted profit before taxes of EUR 4 million

(H1 2015: 5 million) and EUR 2 million (H1 2015: EUR 1 million) respectively.

Central Areas & Others segment

• High charge for the bank levy and deposit guarantee scheme weighs heavily on segment

earnings

• Higher earnings in the year-before period included proceeds from the sale of securities and a

shareholding

The Central Areas & Others segment posted profit before taxes of EUR – 60 million in the first

half (H1 2015: EUR – 22 million). The figure includes consolidation entries not allocated to the

segments. Weighing heavily on the segment’s earnings in the first half was a EUR – 71 million

charge (H1 2015: EUR – 137 million) representing the full-year amount of the bank levy and

deposit guarantee scheme, not including DKB’s share. The figure from the previous year period

also included earnings contributions from the sale of securities and disposal of a shareholding.

The consolidation entries shown in the Consolidation column had no net impact on profit before

taxes (H1 2015: EUR – 1 million). These amounts mainly arise from differences in the way internal

Group transactions are measured and the application of hedge accounting to cross-divisional

derivative transactions.





Non-Core Unit segment

• Non-core business continues to be rapidly wound down as reflected in steep decline in risk-

weighted assets

• Gain from risk provisions in the Restructuring Unit makes significant contribution to segment’s

earnings

• Risk provisions for DKB’s non-core business weigh less on earnings than in the prior-year period

The Non-Core Unit segment posted a profit before taxes of EUR 17 million in the first half of 2016

(H1 2015: loss of EUR – 121 million).

Profit before taxes in the Restructuring Unit division amounted to EUR 67 million (H1 2015:

EUR 64 million). Gross earnings were much lower than the year before period at EUR 22 million

(H1 2015: EUR 65 million), as expected, due to the ongoing winding down of assets. The positive

performance in risk provisions and decrease in administrative expenses more than offset the drop

in gross earnings. Risk provisions contributed EUR 58 million to earnings (H1 2015: EUR 23 million)

thanks to high reversals and recoveries on written down receivables. The fall in administrative

expenses to EUR – 14 million (H1 2015: EUR – 24 million) also reflects the decrease in the portfo-

lio. Risk-weighted assets contracted by 20 percent from the end of 2015 to EUR 2.6 billion.

DKB’s non-core business posted a loss before taxes of EUR – 22 million (H1 2015: EUR – 55 million).

Risk provisions were once again the main reason for the negative result, albeit to a much lesser

degree than in the year-before period.

In the “Other NCU” sub-segment risk provisions were also the main factor behind the profit

before taxes of EUR – 28 million (H1 2015: EUR – 130 million). The figure for the year before

period was mainly due to the measurement loss from the ending of the Swiss franc’s exchange

rate floor in connection with the risk provision created for the loans to HETA.

Financial position

Total assets at BayernLB Group rose slightly by 4.0 percent to EUR 224.3 billion.

Credit volume, defined as the sum of loans and advances to banks and customers and

contingent liabilities from guarantees and indemnity agreements, rose slightly by 3.0 percent

to EUR 180.7 billion, despite subdued demand for loans.

Loans and advances to banks as at 30 June 2016 were EUR 33.9 billion (H1 2015: EUR 29.4 billion),

loans and advances to customers rose 0.8 percent to EUR 136.9 billion.

Liabilities to banks were almost unchanged at EUR 60.1 billion (H1 2015: EUR 60.4 billion).

Liabilities to customers rose by 4.1 percent to EUR 89.6 billion.

After a large amount of issues matured at the end of 2015, securitised liabilities were restocked

by EUR 5.3 billion to EUR 40.2 billion in the first half of 2016.


The EUR 0.9 billion fall in subordinated capital to EUR 3.9 billion broke down into EUR 1.3 billion

from repaying the silent partner contribution of the Free State of Bavaria and EUR 0.4 billion in

new borrowings.

The slight EUR 0.2 billion decline in equity to EUR 10.9 billion is the net result of a

EUR – 0.6 billion increase in the pension provision due mainly to a change in the discount rate,

offset to a large degree by the consolidated net profit from the first half of 2016.

Further information on each item can be found in the notes.

Banking supervisory capital and ratios for the BayernLB Group

Common Equity Tier 1 capital (CET1) amounted to EUR 8.7 billion as at 30 June 2016

(31 December 2015: EUR 10.5 billion). The decline was largely the result of repaying a silent

partner contribution of EUR 1.3 billion to the Free State of Bavaria in April 2016. Strict manage-

ment cut risk-weighted assets (RWA) by 1.7 percent to EUR 68.4 billion. The CET1 ratio was a

solid 12.7 percent (31 December 2015: 15.1 percent), while the “fully loaded” CET1 ratio was

11.3 percent (31 December 2015: 12.0 percent). Total own funds as at 30 June 2016 amounted

to EUR 10.6 billion (31 December 2015: EUR 12.2 billion) and the total capital ratio was

15.5 percent (31 December 2015: 17.6 percent).

General overview of financial performance

The BayernLB Group’s financial position and financial performance was sound overall in the

first half of 2016 despite the still challenging environment. The Risk Report contains additional

information on the financial position.





Report on expected developments and on opportunities and risks

Report on expected developments including opportunities and risks

Economic environment

The upturn in Germany is likely to continue in the second half of 2016 and beyond. However,

the Brexit referendum has noticeably dampened conditions overall. There are two ways in which

this can be expected to affect the German economy. Firstly, demand for German goods will fall

because of the recession BayernLB is forecasting in the UK and the depreciation of sterling. Sec-

ondary effects can also be expected from a weaker economy in the UK’s major trading partners.

All in all, therefore, foreign trade is likely to act as a brake on GDP growth in Germany in the

coming year. Also, uncertainty about the future of the EU and the common internal market will

cause companies to defer their capital spending plans. On the whole, BayernLB forecasts German

economic output will grow modestly in the second half of 2016. But there are no grounds for

assuming Germany will be in a recession. As Germany’s upswing is mainly driven by domestic

demand, particularly consumption, it is more resistant than usual to negative developments

abroad. BayernLB also expects another loosening of monetary policy and a slight easing of fiscal

policy to limit the economic impact of Brexit.

Uncertainty on financial markets is likely to remain high throughout the winter of 2016/17 due to

the political and economic uncertainty following the Brexit referendum, concerns about the EU

and eurozone unravelling in the run-up to the Italian constitutional referendum in October and

the French presidential election in early 2017. Core country bonds are likely to enjoy ongoing

support. Political uncertainties are also weighing on growth and inflationary expectations around

the world, suggesting another decline in global yields. Accordingly, the yield on 10-year Bunds is

not likely to turn positive again until next year and then only marginally. The euro and European

equity markets can expect to be hit by the forthcoming political and economic uncertainty factors

in the wake of the Brexit vote. In addition, BayernLB expects the eurozone economy to suffer

from the recession in the UK and the ECB to again expand its QE purchases of bonds in September.

Overall, therefore, BayernLB expects the euro to weaken significantly against the dollar by the

end of the year. However, a sustained downturn on the equity market should be prevented by

stable global economic growth despite the anticipated slowdown in Europe, the moderate level

of valuation on European equities both absolutely and relative to bonds, and the persistently

expansive monetary policy being pursued by the major central banks. All in all we expect the

DAX to trend sideways in the second half of the year albeit with much volatility.

The BayernLB Group’s future performance

For key forecasts, opportunities and other statements on the expected economic performance for

financial year 2016, please refer to the 2015 Group management report whose earnings forecast

remains intact despite the impact of Brexit, which remains hard to assess.


Risk report

The information provided in the risk report of the Group half-yearly financial report relates to

material changes in the first half of 2016.

In addition, the risk report in the 2015 consolidated financial statements gives a detailed descrip-

tion of the principles, methods, procedures and organisational structures of the risk management

used within the BayernLB Group and of the internal control and risk management system for

ensuring the accounts have been properly prepared and are reliable.


Key developments in the first half of 2016

• Stable risk profile

• Core business expanded in line with strategy

• Risk-bearing capacity maintained at all times

• Good liquidity

The BayernLB Group continued to have a healthy risk profile in the first half of 2016.

Gross credit volume rose by a total of EUR 6.7 billion to EUR 262.9 billion. The volume increase

was mainly concentrated in the Countries/Public-Sector/Non-Profit Organisations and the

Corporates sub-portfolios.

The BayernLB Group’s good portfolio quality was maintained and supported by the expansion of

the core business with good quality assets and by the positive financial and economic environ-

ment in Germany, the BayernLB Group’s core market.

The major portfolio quality metrics remained stable, due to strictly observed risk discipline;

the investment grade share was 81.7 percent (31 December 2015: 80.8 percent) and the non-

performing loan ratio was 2.1 percent (31 December 2015: 2.4 percent).

Risk-bearing capacity was maintained throughout the first half of 2016 as the provision of risk

capital was solid. In addition, the BayernLB Group had a good supply of liquidity on hand.

Internal control and risk management system

The Board of Management decided on a new structure of committees and boards at the level

below the Board of Management for BayernLB at the end of 2015, with an implementation

roadmap for the first half of 2016. The structure of boards and committees was brought into line

with the changed framework conditions and requirements. This predominantly reflects a changed

strategic orientation at the BayernLB Group (significant downsizing and focusing), a new Euro-

pean regulatory structure led by the ECB involving new procedures and processes (the Single

Supervisory Mechanism (SSM) and Supervisory Review and Evaluation Process (SREP)) and the

objective of making corporate management more consistent and transparent within the

BayernLB Group.





Management structure

Supervisory Board and committees

The Supervisory Board monitors and advises BayernLB’s Board of Management. It is assisted in its

work by the committees shown in the table above.

Board of Management and committees (committees and boards)

The Rules and Regulations for the Board of Management of BayernLB allow the creation of

committees with advisory and decision-making powers. In managing the business and the

company the Board of Management is supported by committees and boards.

In the first half of the year, the Board of Management therefore set up/reorganised four committees

with a Group focus. Each committee is headed by a member of the Board of Management. The

Board of Management has transferred responsibilities and, to an extent, decision-making powers

to the committees. The committees have a largely advisory function. Each Board of Management

member’s responsibility for their segment and the overall responsibility of the Board of Manage-

ment pursuant to the Rules and Regulations for the Board of Management and the allocation of

tasks of the BoM continue to apply.

The Management Committee, chaired by the CEO, supports and advises the Group Board of

Management on the strategic orientation of BayernLB and implementation of the management

agenda. The Management Committee provides a forum for regular, up-to-date exchanges of infor-

mation between the first and second levels of management about the strategic orientation of the

BayernLB Group. It also provides stimulus on strategic issues and those of importance to BayernLB.

Management CommitteePerformance & Capital

CommitteeRisk Committee Liquidity Committee

Remuneration Board RWA Board Credit Risk BoardInvestment Board


Project & Investment Board

RU Credit BoardInvestment Board

Real Estate

CFO/COO Board Regulatory Board

Ad-hoc Board

Product Board

Board of Management

Senior Management

Supervisory Board

Nominating Committee

Compensation Committee

Audit Committee Risk CommitteeBayernLabo Committee


The Performance & Capital Committee, chaired by the CFO, monitors the performance/earnings

relationship and (regulatory) capital base. It also prepares decisions on performance and capital

management of BayernLB and the BayernLB Group for the Board of Management. Subject to the

conditions set down in the rules of procedure of the Performance & Capital Committee it takes

decisions itself, where the Board of Management has specifically transferred this authority to the

committee. In doing so it takes account of framework conditions such as the owners’ guidelines

and regulatory requirements. The committee also evaluates new regulatory requirements and

initiates implementation.

The Risk Committee, chaired by the CRO, supports and advises the Board of Management in dis-

cussing changes in the Group risk profile. This includes the risk inventory, risk strategies, stress

test results and scenario analyses. The focus is on ICAAP limit utilisation and evaluating the over-

all risk position in terms of credit risk, market risk, operational risk and non-financial risk (such

as outsourcing and IT). The committee also assesses potential recovery situations, discusses the

main quantitative procedures and methods for managing and monitoring all types of risk (apart

from liquidity risk), reviews new regulatory requirements and initiates implementation in terms

of Pillar 2.

The Liquidity Committee, chaired by the member of the Board of Management responsible for

Financial Markets, takes decisions within the prescribed Risk Strategy and limits and advises the

Board of Management on managing and allocating the key resources of liquidity and funding.

It deals with limiting foreign currency mismatches and the allocation of any potential foreign

currency liquidity gaps to the units in the BayernLB Group that manage liquidity risks and have

limits. The Liquidity Committee also issues recommendations on procedures and methods for

managing and monitoring liquidity risk in the Group and implements new regulatory require-

ments concerning the ensuring of funding and liquidity. The Liquidity Committee provides infor-

mation on important adjustments to the funds transfer pricing curves and changes in pricing

methods and models. When liquidity crises arise it is responsible for taking appropriate action

and informing the Board of Management promptly. The Liquidity Committee is also responsible

for emergency liquidity planning and for the feasibility of liquidity measures in the recovery plan.

Decisions taken by the committee must be unanimous.

Senior Management

The Board of Management has reorganised the board structure at senior management level to

make it more consistent. Boards generally act across segments without the Board of Management

being directly involved.

The Remuneration Board, chaired by the head of the HR division, acts in an advisory role on

issues related to structuring an appropriate and transparent remuneration system for employees

with the aim of promoting BayernLB’s sustainable growth. It also supports the Remuneration

Officer in the performance of his or her duties with subject-related advice. Fulfilment of the

duties also serves the appropriate involvement of control units in the structuring and monitoring

of remuneration system.





The RWA Board, chaired by the head of the Controlling division, monitors and manages changes

in risk weighted assets at the BayernLB Group. The RWA Board discusses recommended decisions

from its individual members for the Performance & Capital Committee and/or the Board of

Management on analysing trends in RWA. Particular attention is paid to regulatory developments,

current business performance and planning and related tax issues.

The Project & Investment Board, chaired by the head of the Organisation division, was created

on 1 April 2016 by the COO with the approval of the Board of Management. The tasks of this

Board include drafting a proposed annual budget for projects and capital spending, including

prioritisation and approval, and monitoring budget utilisation and project status during the

year. If necessary the Board can decide to reallocate budgets between business areas and

central areas.

The CFO/COO Board was reorganised in the first half of 2016 (with effect from the third quarter

of 2016) and replaces both the CFO Committee and the IT Governance Committee. Apart from the

CFO/COO of BayernLB and the heads of the divisions within the Operating and Financial Office,

the Board also consists of at least one representative each from DKB, BayernInvest and Real I.S.

The Board is a forum for exchanging information on the latest legal, regulatory, competitive and

other trends relevant to the BayernLB Group within the Operating and Financial Office. The focus

is primarily on the implementation status of Group-wide management tools, any refinements

necessary and synergies within the BayernLB Group.

The Credit Risk Board, chaired by the head of the Risk Office Credit Analysis division, is the highest

competence holder for credit matters below the Board of Management. The Board of Manage-

ment of BayernLB has delegated operational credit decisions and votes on the core business

of BayernLB and the BayernLB Group to the Credit Risk Board. The Board also deals with sector

portfolio, country and product reports and matters of principle relating to credit risk manage-

ment for the core business. The Credit Risk Board comprises representatives of the front and back

office units of BayernLB and DKB.

The RU Credit Board, chaired by the head of the Restructuring Unit, has a decision making and

voting function for all operational issues relating to the wind down of assets; in particular it

decides on credit applications under authority granted by the Board of Management. The RU

Credit Board also votes on strategic decisions on drafting and revising the Business and Risk Strat-

egies for exposures allocated to it. In accordance with its wind down function, the RU Credit

Board does not approve new business.

In 2015 the Board of Management of BayernLB decided to set up a Regulatory Board, chaired by

the head of the Group Compliance division, in light of the rising and ever more complex regula-

tory requirements at both national and European level. The first constituent meeting was held in

the first half of 2016. The task of the Regulatory Board is to provide management with an over-

view of future regulatory requirements and assign lead management responsibility for major

requirements or work packages both before and during the consultation phase. This is particu-

larly relevant when regulations affect more than one area. The Regulatory Board plays a coordi-

nating role in this respect, in terms of ensuring issues are assigned to a responsible party at an

early stage.


The Ad Hoc Board, chaired by the head of the Group Compliance division, is responsible for

reviewing and determining whether BayernLB is required to make an ad hoc announcement

pursuant to the German Securities Trading Act (WpHG) in conjunction with the Market Abuse

Regulation (MAR).

The Product Board (previously the Product Committee), organised by the Group Risk Control divi-

sion, is responsible for complying with MaRisk requirements for the launch of business activities

in new products. It is mainly in charge of approving new products and regularly approving the

valuation models used and changes to these models. The Product Board comprises senior man-

agement from the business areas and the main central areas.

Investment Boards are the highest authority below the Board of Management for capital and

resource allocation in the respective business area. Business area-specific management is carried

out through these boards on the basis of central rules and ratios and the strategic targets of the

area. The Investment Boards also decide on the German connectivity of customers and/or transac-

tions, thereby satisfying the conditions imposed by the EU for transactions with borrowers whose

registered office is outside Germany. The members of the Investment Board for the Corporates &

Mittelstand business area are the Heads of the Product Solutions & Business Area Management

division, Global Structured & Trade Finance division, Global Corporates division and Mittelstand

division. Responsibilities include managing individual transactions according to the submission

criteria and taking into account the overall customer relationship. The Investment Board of the

Real Estate & Savings Banks/ Association business area comprises the Heads of the Real Estate,

Group Treasury and Risk Office Credit Analysis divisions. Responsibility includes business area-

specific management of new business and renewals in the Real Estate division.

Risk-bearing capacity

Risk-bearing capacity is monitored using the Internal Capital Adequacy Assessment Process

(ICAAP) at the BayernLB, DKB and the BayernLB Group levels including the consolidated risk units

of the above-mentioned major subsidiaries. The aim of ICAAP is to ensure that there is sufficient

economic capital to fully cover the risks assumed or planned at all times.

For risk management, BayernLB follows a liquidation-based approach in ICAAP that is designed to

protect senior creditors. This is computed using the internally targeted standard for the accuracy

of risk measurement, which correspond to a confidence level of 99.95 percent. The method for

calculating risk-bearing capacity is assessed and refined on a regular basis to ensure it takes

adequate account of external factors and internal strategic targets.

To date, the risk capital requirement for business and strategic risk, liquidity cost risk and

BayernLB’s own real estate risk has been deducted directly from economic capital. As part of the

Risk Strategy adjustment for 2016, limits have been set for these risks too and are included in the

maximum risk appetite of EUR 8.1 billion. The figures as at 31 December 2015 have been adjusted

accordingly.





Economic capital adequacy (risk capital requirement)

EUR million 30 Jun 2016 31 Dec 2015

Counterparty risk (credit and country risk) 1,193 1,211

Market risk

• of which actual market risk

• of which pension risk

1,831

712

1,119

2,595

1,104

1,491*

Operational risk 500 488

Investment risk 109 112

Business and strategic risk (includes reputational risk) 799 882

Liquidity cost risk 302 303

Real estate risk – –

Total 4,734 5,590

* The risk capital requirement for risks from pension liabilities as at 31 December 2015 has been adjusted for comparison purposes owing to

the change in methodology.

The BayernLB Group had adequate risk-bearing capacity, as the provision of risk capital was solid.

Most of the decline in risk capital requirement related to market risk and business and strategic

risk. Market risk, which includes the risk from pension liabilities, declined as market volatility fell

and positions were changed. Pension risk reflects adjustments in methodology, which are discussed

in more detail in the section on market risk. The risk capital requirement for pension risk as at

31 December 2015 has been adjusted accordingly. No risk capital is required for real estate risk,

because of the high level of hidden reserves and upward changes in the market value of BayernLB’s

own real estate.

The BayernLB Group holds sufficient available economic capital at EUR 12.5 billion (31 December

2015: EUR 12.7 billion) to cover risk capital requirements. Expected charges for pension liabilities

are deducted from economic capital.

As part of the BayernLB Group’s stress testing programme, the possibility of a severe economic

downturn arising (ICAAP stress scenario) is routinely calculated. Under the assumption of a severe

recession, the total risk capital requirement for the individual types of risk rises to EUR 9.3 billion

(31 December 2015: EUR 10.8 billion) and available economic capital is 74.9 percent (31 Decem-

ber 2015: 84.9 percent) utilised. The BayernLB Group has adequate capital even for this scenario.

The regulatory minimum capital ratios were met in the going concern scenario when retained

earnings are included.

Management of the individual risk types in the Group

Credit risk

The following presentation of credit risk uses the management approach, which is based on the

figures used for internal reporting to the Board of Management and the Risk Committee of the

Supervisory Board. The figures are based on an economic perspective and therefore differ in some

aspects from the rules applicable for accounting purposes (e.g. undrawn internal current account

limits are taken into account). There may also be deviations from the scope of accounting consoli-

dation, as internal risk management includes the major Group units (BayernLB and DKB).


Credit risk is also presented using the balance sheet approach, which is based on balance sheet

figures and focuses on the value of the financial assets shown in the balance sheet.

Portfolio overview in accordance with IFRS 7.34a (management approach)

The figures for the management approach include BayernLB and DKB.

Gross credit volume by unit

30 Jun 2016 Total: EUR 262,851 million

31 Dec 2015 Total: EUR 256,109 million

The gross credit volume for credit transactions includes gross business volume – drawdowns plus

open commitments – and undrawn internal current account limits. For trading transactions it is

calculated from market value, for derivatives transaction from credit equivalent amounts.

Compared to 31 December 2015, the BayernLB Group’s gross credit volume rose by EUR 6.7 billion

or 2.6 percent to EUR 262.9 billion. The increase was across the board. Both institutions grew

their business. The BayernLB Group grew business in four out of five sub-portfolios; Retail/Other

was almost unchanged.

At BayernLB gross credit volume was up by EUR 4.9 billion, mainly due to business expansion in

the Countries/Public-Sector/Non-Profit Organisations, Corporates and Financial Institutions

sub-portfolios.

DKB grew gross credit volume by a further EUR 1.9 billion, mainly in the Countries/Public-Sector/

Non-Profit Organisations, Corporates and Commercial Real Estate sub-portfolios.

BayernLB DKB

EUR million

250,000

200,000

150,000

100,000

50,000

0

172,011

84,099

176,874

85,977





Gross credit volume in the BayernLB Group is broken down below by sub-portfolio, rating category,

region and size.

Gross and net credit volume by sub-portfolio



Sub-portfolios

EUR million

Gross Net

30 Jun 2016 31 Dec 2015

Change

(in %) 30 Jun 2016 31 Dec 2015

Change

(in %)

Corporates 71,143 69,131 2.9% 54,644 52,824 3.4%

Financial Institutions 57,333 56,108 2.2% 54,746 54,440 0.6%

Countries/Public Sector/

Non-profit Organisations 57,796 54,887 5.3% 55,676 53,036 5.0%

Commercial Real Estate 45,163 44,458 1.6% 13,818 12,835 7.7%

Retail/Other 31,417 31,525 – 0.3% 18,377 17,960 2.3%• of which Retail 31,146 31,153 0.0% 18,126 17,621 2.9%

Total 262,851 256,109 2.6% 197,261 191,094 3.2%

Net credit volume is calculated as gross exposure less the value of collateral. This rose by

EUR 6.2 billion at the BayernLB Group. The rise was mainly in the Countries/Public-Sector/ Non-

Profit Organisations (EUR 2.6 billion), Corporates (EUR 1.8 billion) and Commercial Real Estate

(EUR 1.0 billion) sub-portfolios.

Corporates sub-portfolio

As in the previous year, this sub-portfolio grew. Gross credit volume was up by EUR 2 billion to

EUR 71.1 billion. This is equivalent to a rise of 2.9 percent. Corporates remains by far the largest

sub-portfolio within the BayernLB Group.

EUR million

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0Corporates Financial

Institutions

Countries/Public

Sector/Non-profit

Organisations

Commercial

Real Estate

Retail/Other

69

,13

1

56

,10

8

54

,88

7

44

,45

8

31

,52

5

71

,14

3

57

,33

3

57

,79

6

45

,16

3

31

,41

7


Sector breakdown within the Corporates sub-portfolio



Gross credit volume within the sub-portfolio rose across the board. Business expanded in nearly

all sectors. The majority of the increase occurred in the following three sectors:

In Automotive the exposure was up EUR 0.6 billion, especially in automotive financing.

In Telecoms, media & technology exposure increased by EUR 0.5 billion, largely in telecoms net-

work operators.

In Raw materials, oil & gas the exposure rose by EUR 0.5 billion, primarily in metals.

Logistics & aviation, Chemicals, pharmaceuticals & healthcare and Construction also witnessed an

increase in gross credit volume.

Manufacturing & engineering, aerospace & defence was the only sector with any appreciable

decline in gross credit volume (EUR 0.5 billion).

Volumes were stable over the reporting period in Utilities, which is the largest sector by far. In

line with strategy, renewable energies such as solar and wind parks with long-term feed-in tariffs

are the focus here, at 55.4 percent. The great majority of individual transactions are structured as

granular project financings and granted by DKB. Within the sector DKB has an above-average

share of the portfolio at 61.4 percent. Apart from project financing, another focus is traditional

corporate loans for large energy companies and municipal utilities. Most of the financing volume

at 87.1 percent is in western Europe; 78.2 percent of this is in Germany alone. The portfolio

remains granular and is spread over some 2,500 individual customers.

The share of Germany within the Corporates sub-portfolio remains high at 70.3 percent

(31 December 2015: 71.2 percent).

Utilities Logistics & aviation

Chemicals, pharma-

ceuticals &healthcare

Telecoms, media &

technology

Automotive Manufacturing & engineering, aerospace &

defence

Raw materials,oil & gas

Consumer goods,

tourism, wholesale &

retail

Construction

EUR million

25,000

20,000

15,000

10,000

5,000

0

23

,28

0

7,7

78

6,3

30

6,9

75

5,7

63

5,8

36

5,4

82

6,3

68

3,3

31

23

,28

6

7,4

57

6,0

20

6,4

30

5,2

00

6,2

95

4,9

67

6,3

37

3,1

40





The already high investment grade share rose slightly to 69.7 percent (31 December 2015:

69.0 percent).

Granularity in the sub-portfolio also improved, with 51.1 percent (31 December 2015: 50.6 percent)

relating to customers with a gross credit volume of less than EUR 50 million.

Non-core business belonging to this sub-portfolio fell again by EUR 0.2 billion to EUR 1.9 billion.

Financial Institutions sub-portfolio

Gross credit volume in Financial Institutions rose to EUR 57.3 billion (31 December 2015:

EUR 56.1 billion). Gross credit volume within the sub-portfolio in the BayernLB Group broke

down as follows: EUR 55.8 billion related to BayernLB, EUR 1.5 billion to DKB.

During the period under review, gross credit volume in the sub-portfolio was up by EUR 1.2 billion

or 2.2 percent. The main contributor to this was banks (EUR 1.4 billion). Here the exposure rose

primarily at commercial banks and cooperative banks. There was also a rise at savings banks

(EUR 0.2 billion).

Exposure to insurance was down EUR 0.4 billion to EUR 4.2 billion.

Portfolio quality remained very high. The investment grade share of the sub-portfolio edged up

to 93.8 percent (31 December 2015: 92.7 percent). The share in Germany rose to 59.1 percent


Countries/Public-Sector/Non-Profit Organisations sub-portfolio

The gross credit volume in the Countries/Public-Sector/Non-Profit Organisations sub-portfolio

was up by EUR 2.9 billion or 5.3 percent to EUR 57.8 billion (31 December 2015: EUR 54.9 billion).

Of this amount, EUR 41.7 billion related to BayernLB and EUR 16.1 billion to DKB.

Of the increase in gross credit volume, EUR 1.9 billion was in Germany and EUR 1.0 billion

abroad. Within Germany, a large amount related to the Deutsche Bundesbank. Business with

German local authorities was also expanded.

The increase in business volume abroad was concentrated on central banks. Most of this was with

the US Federal Reserve. Business with foreign local authorities declined over the reporting period.

Customer relationships in this sub-portfolio were utilised in part for liquidity management.

The investment grade share remained very high at 97.6 percent (31 December 2015: 97.4 percent).

Commercial Real Estate sub-portfolio

As at the reporting date, gross credit volume in Commercial Real Estate was EUR 45.2 billion

(31 December 2015: EUR 44.5 billion). Of this amount, EUR 20.9 billion stemmed from BayernLB

and EUR 24.3 billion from DKB.

During the period under review, gross credit volume was up by EUR 0.7 billion or 1.6 percent.

Of this amount, EUR 0.4 billion related to BayernLB and EUR 0.3 billion to DKB.


The expansion in business volume across the Group is all the more significant given the fact that

it includes the reduction of non-core business in this sub-portfolio. Gross credit volume in the

relevant non-core business at the BayernLB Group fell by a further EUR 0.6 billion. The core busi-

ness saw an increase of EUR 1.3 billion, more than making up for the reduction.

Most of the increase in the core business at DKB was in housing companies, and at BayernLB in

real estate leasing by investors and developers. Business volume mainly rose in the core market,

Germany. Of the growth in the business at the BayernLB Group, 77 percent was in Germany.

The share in Germany rose to 88.2 percent (31 December 2015: 87.5 percent).

The quality of the Commercial Real Estate sub-portfolio remained very high. The investment grade

share also rose slightly to 77.0 percent (31 December 2015: 76.5 percent). Customers with a gross

credit volume of less than EUR 50 million accounted for a high proportion (more than 60 percent)

of the sub-portfolio, underscoring its highly granular structure. The collateralisation ratio is

69.4 percent (31 December 2015: 71.1 percent), still around the three-year average of 70 percent.

Retail/Other sub-portfolio

In Retail/Other, the smallest sub-portfolio, gross credit volume fell by a total of EUR 0.1 billion or

0.3 percent to EUR 31.4 billion. The main reason for the drop was the reduction in the retail busi-

ness at BayernLB in line with strategy. By contrast, retail business at DKB was up slightly in the

first half of 2016. The share in Germany is virtually 100 percent Group-wide.

Breakdown by rating

The following table shows gross credit volume by rating category and sub-portfolio.

Gross credit volume by rating category and sub-portfolio



MR 0 – 7 MR 8 – 11 MR 12– 14 MR 15 – 18 MR 19 – 21 MR 22 – 24 Core

MR 22 – 24 Non-core

Default categories (Non-performing)

Investment grade Non-investment grade

EUR million

200,000

150,000

100,000

50,000

0

15

2,3

43

62

,42

6

31

,33

1

8,7

76

2,3

47

1,3

69

4,2

60

14

7,7

02

59

,28

6

30

,76

6

9,7

68

2,5

13

1,5

90

4,4

84





30 Jun 2016

Rating categories

EUR million MR 0 – 7 MR 8 – 11 MR 12 – 14 MR 15 – 18 MR 19 – 21 MR 22 – 24

(of which

non-core) Total

Corporates 18,399 31,195 14,329 4,750 1,170 1,301 724 71,143

Financial Institutions 48,845 4,909 862 137 0 2,580 2,511 57,333


Non-profit Organisations 55,312 1,105 1,101 258 18 2 – 57,796

Commercial Real Estate 21,654 13,108 6,815 1,943 346 1,296 997 45,163

Retail/Other* 8,133 12,109 8,224 1,687 813 450 28 31,417

Total 152,343 62,426 31,331 8,776 2,347 5,629 4,260 262,851

31 Dec 2015

Rating categories

EUR million MR 0 – 7 MR 8 – 11 MR 12 – 14 MR 15 – 18 MR 19 – 21 MR 22 – 24

(of which

non-core) Total

Corporates 18,829 28,891 13,769 5,120 1,108 1,415 765 69,131

Financial Institutions 47,928 4,067 793 456 2 2,863 2,755 56,108


Non-profit Organisations 52,510 978 1,105 268 25 2 – 54,887

Commercial Real Estate 20,690 13,317 6,615 2,058 503 1,275 936 44,458

Retail/Other* 7,745 12,035 8,483 1,867 877 519 27 31,525

Total 147,702 59,286 30,766 9,768 2,513 6,074 4,484 256,109

* Of which, gross credit volume in Retail of EUR 31.1 billion on 30 June 2016 (31 December 2015: EUR 31.2 billion).

In the rating categories with master rating (MR) 0 – 7 and 8 – 11 (investment grade), gross credit

volume at the BayernLB Group rose by EUR 7.8 billion in the first half of 2016. The investment

grade share improved slightly from 80.8 percent to 81.7 percent.

Gross credit volume in rating category MR 12 – 14 was up by EUR 0.6 billion. However, the

percentage of gross credit volume in this rating category was almost unchanged at 11.9 percent


Gross credit volume in rating categories MR 15 – 18 and MR 19 – 21 fell by a total of EUR 1.2 billion

over the reporting period. The percentage of gross credit volume in the above rating categories

remained largely stable.

The non-performing loan ratio (NPL ratio) on the reporting date improved to 2.1 percent

(31 December 2015: 2.4 percent). In the core business, the NPL ratio was 0.5 percent

(31 December 2015: 0.7 percent). In the non-core business, the NPL ratio rose to 39.8 percent

(31 December 2015: 36.0 percent). This was mainly linked to the sharp decline in gross credit

volume in the non-core portfolio to EUR 10.7 billion (31 December: EUR 12.5 billion). Adequate

risk provisions were set aside to cover loans added to the default categories.


Breakdown by region

The following table shows gross credit volume by region.

Gross credit volume by region



In line with the Business and Risk Strategy, Germany accounted for a dominant share of the

BayernLB Group’s lending at 76.2 percent (31 December 2015: 76.5 percent). Gross credit volume

there was EUR 200.3 billion (31 December 2015: EUR 195.8 billion). Germany was therefore the

country with the largest increase in volume with gross credit volume up EUR 4.5 billion in the

first half of 2016.

At a regional level there was a sharp rise of EUR 1.2 billion in North America, taking gross credit

volume in North America to EUR 15.8 billion (31 December 2015: EUR 14.6 billion). The increase

was mainly driven by the expansion of business in the USA, particularly with the Federal Reserve.

These transactions are partly related to liquidity management.

Business volume in the Confederation of Independent States (CIS) was cut back further owing to

the political risks. Gross credit volume fell by EUR 0.3 billion to EUR 1.5 billion (31 December 2015:

EUR 1.8 billion). The main reduction in business was in Russia.

In light of global developments (increasing political tensions, especially Turkey, the Brexit vote

and the low oil price), country risks and risk/return ratios in foreign business generally continued

to be very closely managed and monitored.

Germany Western Europe

North America

Eastern Europe

Supranational orgs.

CISAsia/Australia/Oceania

Middle East LatinAmerica/Caribbean

Africa

EUR million

250,000

200,000

150,000

100,000

50,000

0

20

0,3

16

35

,20

7

15

,81

0

3,4

94

1,9

91

1,5

05

1,6

76

1,7

50

82

8

27

4

19

5,8

21

34

,08

9

14

,57

3

3,4

95

1,7

83

1,8

04

1,6

37

1,7

28

88

9

29

0





Gross credit volume in western Europe



In western Europe gross credit volume was up EUR 1.1 billion to EUR 35.2 billion (31 December 2015:

EUR 34.1 billion). Most of the rise related to Switzerland. There were also increases in the UK,

Spain and Italy. Gross credit volume was down, however, in Austria, France, Iceland and Belgium.

Issuer risk

The following table shows issuer risk by region.

Gross issuer risk by region



United Kingdom

France Austria Switzerland Scandinavia Netherlands Spain Belgium Italy Other western Europe

Other peripheral (PT, IE, GR)

EUR million

12,000

10,000

8,000

6,000

4,000

2,000

0

8,4

22

6,0

89

4,0

70

4,1

09

3,5

41

2,7

60

2,2

11

1,0

09

1,9

42

53

7

51

7

7,8

72

6,3

32

4,3

76

3,3

35

3,4

70

2,8

39

1,8

25

1,1

76

1,6

35

74

9

48

1

EUR million

25,000

20,000

15,000

10,000

5,000

0Germany Western

EuropeNorth America Supranational

orgs.Eastern

Europe/CISOther

regions

13

,11

6

13

,50

2

10

,05

7

9,6

62

6,1

80

5,7

84

1,7

73

1,8

68

31

1

30

8

24

6

37

3


Gross issuer risk fell again in the first half of 2016. It declined in total by EUR 0.2 billion

to EUR 31.5 billion (31 December 2015: EUR 31.7 billion). The reductions were mainly in

western Europe and North America. In Germany, gross issuer risk rose to EUR 13.5 billion

(31 December 2015: EUR 13.1 billion).

Breakdown by size category

The following table shows net credit volume by size.

Net credit volume by size



Net credit volume was down sharply in the size category above EUR 2.5 billion. It declined in total

by EUR 3.2 billion to EUR 9.9 billion (31 December 2015: EUR 13.1 billion). This size category only

contains loans and advances to top-rated government entities with a master rating of 0 or 1.

Net credit volume with customers in the more than EUR 500 million to EUR 2.5 billion category

was up by EUR 4.2 billion to EUR 24.2 billion (31 December 2015: EUR 20.0 billion). The increase

was concentrated in the Financial Institutions and the Countries/Public-Sector/Non-Profit

Organisations sub-portfolios. In Corporates, by contrast, business volume was down.

Net credit volume in the EUR 0 million to EUR 100 million category was up by EUR 3.1 billion

to EUR 98.8 billion (31 December 2015: EUR 95.7 billion). The increase was primarily in the

Corporates, Countries/Public-Sector/Non-Profit Organisations and Retail/Other sub-portfolios.

EUR million

60,000

50,000

40,000

30,000

20,000

10,000

0

29

,27

4

29

,71

0

46

,60

5

48

,26

3

19

,80

0

20

,84

1

36

,59

63

8,6

78

25

,75

0

25

,70

3

14

,90

4

14

,65

1

5,0

649,5

06

13

,10

09

,90

9

Volume > EUR 500 million Volume EUR 50 to 500 million Volume < EUR 50 million

Up to 5 million

> 5 million to 50 million




> 500 million to 1 billion

> 1 billion to 2.5 billion

> 2.5 billion





Summary

Overall, the quality of the credit portfolio remains very good. This is reflected in the continued

high share in investment grade, which improved from 80.8 percent to 81.7 percent. The portfolio’s

already high granularity was essentially unchanged: exposures with a net credit volume of less

than EUR 500 million were in line with the previous year at 82.7 percent. There was further

growth in the core business with target customers. Particularly worthy of note is the rise of

EUR 2.2 billion in the Corporates sub-portfolio. The Bank continued to wind down the non-core

portfolio considerably (EUR 1.8 billion) in line with strategy, while expanding the core business

(EUR 8.5 billion).

Portfolio overview pursuant to IFRS 7.36a (balance sheet approach)

Based on data from the IFRS consolidated financial statements, the presentation below shows

the BayernLB Group’s maximum credit risk under IFRS 7.36a taking account of IFRS 7.B9. The

gross carrying amounts are reduced by the offsetting amounts calculated in accordance with

IAS 32 and impairment losses calculated in accordance with IAS 39. Credit risks included under

“non-current assets or disposal groups classified as held for sale” are allocated to the relevant

positions in the following tables (for individual amounts see the details in note 25). Information

on forbearance exposures is also included.

The figures used in the balance sheet approach for the maximum credit risk pursuant to IFRS 7.36a

are based on the IFRS scope of consolidation. Besides BayernLB and DKB, these include mainly

Real I.S. and BCS.


Maximum credit risk


Cash reserves 3,796 2,246 • Loans and receivables 3,796 2,246

Loans and advances to banks 33,898 29,310 • Loans and receivables 33,898 29,307 • Fair value option – 3

Loans and advances to customers 134,440 133,458 • Loans and receivables 134,132 132,743 • Available for sale 11 12 • Fair value option 297 703

Assets held for trading* 19,375 17,070** • Held-for-Trading 19,375 17,070

Positive fair values from derivative financial instruments 1,447 1,527 • Held for trading 1,447 1,527

Financial investments* 27,052 27,964 • Available for sale 26,776 27,610 • Fair value option 10 11 • Loans and receivables 266 343

Contingent liabilities 9,947 10,202

Irrevocable credit commitments 21,944 21,468

Total 251,899 243,245

* Not including equity instruments.

** Adjusted as per IAS 8.42 (see note 2).





Financial assets that are neither past due nor impaired

30 Jun 2016

in %

Maximum credit risk

Rating categories

0 – 7 8 – 11 12 – 17 18 – 21Default

categories Unrated Total

Cash reserves 1.5 – – – – 0.0 1.5 • Loans and receivables 1.5 – – – – 0.0 1.5

Loans and advances to banks 11.2 1.8 0.4 0.0 – 0.0 13.4 • Loans and receivables 11.2 1.8 0.4 0.0 – 0.0 13.4 • Fair value option – – – – – – –

Loans and advances to customers 26.3 14.7 10.1 1.1 0.0 0.0 52.2 • Loans and receivables 26.2 14.7 10.1 1.1 0.0 0.0 52.1 • Available for sale – – – – – – –• Fair value option 0.1 0.0 0.0 – – – 0.1

Assets held for trading 5.9 1.4 0.3 0.0 0.0 – 7.6 • Held-for-Trading 5.9 1.4 0.3 0.0 0.0 – 7.6

Positive fair values from derivative financial instruments 0.5 0.1 – – – – 0.6 • Held for trading 0.5 0.1 – – – – 0.6

Financial investments 10.0 0.6 0.0 – 0.0 – 10.6 • Available for sale 10.0 0.5 0.0 – 0.0 – 10.5 • Fair value option – 0.0 – – – – 0.0 • Loans and receivables 0.0 0.1 0.0 – – – 0.1

Contingent liabilities 1.8 1.1 1.0 0.1 0.0 0.0 3.9

Irrevocable credit commitments 3.9 3.0 1.7 0.1 0.0 – 8.7

Total 61.1 22.6 13.5 1.3 0.0 0.0 98.5


31 Dec 2015

in %

Maximum credit risk

Rating categories

0 – 7 8 – 11 12 – 17 18 – 21Default

categories Unrated Total

Cash reserves 0.9 0.0 – – – 0.0 0.9 • Loans and receivables 0.9 0.0 – – – 0.0 0.9

Loans and advances to banks 10.5 1.3 0.3 0.0 0.1 0.0 12.0 • Loans and receivables 10.5 1.3 0.3 0.0 0.1 0.0 12.0 • Fair value option 0.0 – – – – – 0.0

Loans and advances to customers 26.8 13.2 11.9 1.3 0.1 0.1 53.5 • Loans and receivables 26.6 13.2 11.8 1.3 0.1 0.1 53.2 • Available for sale – – – – – – – • Fair value option 0.2 0.0 0.1 – – 0.0 0.3

Assets held for trading 5.3 1.4 0.2 0.0 0.0 – 7.0 • Held for trading 5.3 1.4 0.2 0.0 0.0 – 7.0

Positive fair values from derivative financial instruments 0.6 0.0 – – – – 0.6 • Held for trading 0.6 0.0 – – – – 0.6

Financial investments 10.9 0.5 0.0 – 0.0 0.0 11.5 • Available for sale 10.9 0.4 0.0 – 0.0 0.0 11.3 • Fair value option – 0.0 – – – – 0.0 • Loans and receivables 0.1 0.1 0.0 – – – 0.1

Contingent liabilities 1.9 1.1 1.0 0.1 0.0 0.0 4.2

Irrevocable credit commitments 3.6 3.3 1.8 0.1 0.0 0.0 8.8

Total 60.6 20.9 15.2 1.6 0.0 0.1 98.4





Financial assets that are past due but not impaired*

30 Jun 2016

EUR million

Maximum credit risk

Time past due

< 30 days> 30 days

to 3 months> 3 months

to 1 year > 1 year TotalFair value collateral

Cash reserves – – – – – –

Loans and advances to banks – – – 1.0 1.0 – • Loans and receivables – – – 1.0 1.0 –

Loans and advances to customers 33.5 242.8 160.4 28.7 465.4 27.0 • Loans and receivables 33.5 242.8 160.4 28.7 465.4 27.0

Assets held for trading – – – – – –

Positive fair values from derivative financial instruments – – – – – –

Financial investments 307.0 – – – 307.0 – • Available for sale 307.0 – – – 307.0 –

Contingent liabilities – – – – – –

Irrevocable credit commitments – – – – – –

Total 340.5 242.8 160.4 29.7 773.4 27.0

Fair value collateral 2.8 15.7 4.5 4.1 27.0

31 Dec 2015

EUR million

Maximum credit risk

Time past due

< 30 days> 30 days

to 3 months> 3 months

to 1 year > 1 year TotalFair value collateral**

Cash reserves – – – – – –

Loans and advances to banks – – 0.5 3.4 3.9 – • Loans and receivables – – 0.5 3.4 3.9 –

Loans and advances to customers 43.8 283.0 74.5 24.4 425.7 25.7 • Loans and receivables 43.8 283.0 74.5 24.4 425.7 25.7

Assets held for trading – – – – – –

Positive fair values from derivative financial instruments – – – – – –

Financial investments 111.7 – – – 111.7 – • Available for sale 111.7 – – – 111.7 –

Contingent liabilities – – – – – –

Irrevocable credit commitments – – – – – –

Total 155.5 283.0 75.0 27.8 541.4 25.7

Fair value collateral 3.9 4.7 15.2 1.8 25.7

* The portfolio reflects the creation of portfolio loan loss provisions: “not impaired” in this context means “no specific loan loss provisions made”.

** Adjusted as per IAS 8.42 (see note 2).


Financial assets that are impaired

EUR million

Maximum credit risk Fair value collateral

30 Jun 2016 31 Dec 2015* 30 Jun 2016 31 Dec 2015*

Cash reserves – – – –

Loans and advances to banks 52.2 567.2 – – • Loans and receivables 52.2 567.2 – –

Loans and advances to customers 2,505.0 2,445.6 729.2 826.3 • Loans and receivables 2,494.5 2,433.6 719.0 814.6 • Available for sale 10.5 12.0 10.2 11.7

Assets held for trading 271.6 238.1 – – • Held for trading 271.6 238.1 – –

Positive fair values from derivative financial instruments – – – –

Financial investments 0.0 0.0 – – • Available for sale 0.0 0.0 – –

Contingent liabilities 42.8 2.2 – –

Irrevocable credit commitments 39.3 23.0 – –

Total 2,910.9 3,276.0 729.2 826.3

* Adjusted as per IAS 8.42 (see note 2).

Renegotiated credits

Forbearance exposures

30 Jun 2016

EUR million Forbearance/deferrals Impairments

Collateral/financial

guarantees received

Loans and advances to banks 53.6 – 10.7 0.0

Loans and advances to customers 4,729.9 – 1,827.2 756.2

Financial investments 0.0 0.0 0.0

Credit commitments 206.0 2.5 1.9

Total 4,989.5 – 1,835.5 758.1

31 Dec 2015

EUR million Forbearance/deferrals Impairments

Collateral/financial

guarantees received

Loans and advances to banks 197.2 – 96.8 0.0

Loans and advances to customers 4,724.9 – 1,732.5 803.6

Financial investments 17.1 – 0.7 0.0

Credit commitments 168.4 50.3 2.6

Total 5,107.6 – 1,779.7 806.2





Portfolios with elevated risk profiles (Financial Stability Board recommendations)

The Financial Stability Board, which was established by the supervisory authorities and govern-

ments of countries in which the world’s leading financial centres are located, issued recommen-

dations in 2008 on the disclosure of information on portfolios with elevated risk profiles. The

greater transparency is intended to strengthen trust among financial market participants.

Portfolios with elevated risk profiles as defined by the Financial Stability Board contain transactions

structured exclusively for customers, leveraged finance transactions and the indirect exposure to

US monolines.

Customer transactions

The nominal volume of transactions structured for customers rose to a total of EUR 2.1 billion in

the reporting period (31 December 2015: EUR 2.0 billion).

The portfolio consists almost solely of transactions structured for target customers of BayernLB.

Trade, leasing receivables and accounts receivable from target customers are financed via the

Corelux S.A. ABCP programme, which exists solely for this purpose.

Only one transaction that is not related to target customers remains. This is in the amount of

EUR 39 million (31 December 2015: EUR 45 million) and is being wound down in the Restructuring

Unit under close observation.

Monolines

The indirect exposure to US monolines (insurers that specialise in hedging structured securities)

fell to a nominal volume of EUR 75 million (31 December 2015: EUR 109 million). The rest of

BayernLB’s indirect credit exposure is scheduled for run-off and will shrink as transactions

gradually mature.

With regard to its indirect exposure, the monolines are not direct borrowers but serve as guaran-

tors. BayernLB always based its credit decision in these cases primarily on the credit standing of

the actual borrower or issuer or on the financing structure. The monoline guarantee was viewed

at the time the transaction was concluded only as an additional hedging instrument.

Leveraged finance

This includes leveraged buyouts (corporate acquisitions by financial investors) and corporate-

to-corporate transactions (corporate acquisitions by strategic investors). As financing is normally

on a non-recourse basis, repayments are mostly funded by the future cash flows of the acquired

entity. Acquisition financing is typically highly leveraged, long dated (usually over five years),

involves extensive covenants and collateral and a large number of contractual restrictions

(e.g. on acquisitions, investments, distributions and additional debt).


Credit volume within the BayernLB Group was mostly unchanged at EUR 966 million

(31 December 2015: EUR 970 million). The share in Germany remained largely stable at 88 percent

(31 December 2015: 87 percent). The rest of the portfolio (12 percent) related to western Europe

(31 December 2015: 13 percent).

Leveraged finance transactions are solely at BayernLB and break down by sector and rating

category as follows:

Gross credit volume by sector

30 Jun 2016 Total: EUR 966 million

31 Dec 2015 Total: EUR 970 million

Within the sectors, the rankings of the sub-sectors were largely unchanged on the previous year.

The largest sub-sectors in terms of volume were media at EUR 188 million (31 December 2015:

EUR 161 million), technology at EUR 140 million (31 December 2015: EUR 142 million) and whole-

sale & retail at EUR 111 million (31 December 2015: EUR 186 million).

EUR million

400

350

300

250

200

150

100

50

0Consumer

goods, tourism, wholesale &

retail

Telecoms, media & tech-

nology

Chemicals, pharmaceuticals

& healthcare

Construction Manufacturing & engineering,

aerospace & defence

Automotive Raw materials, oil & gas

Logistics & aviation

Other

33

3.5

34

0.7

79

.6

80

.8

73

.9

56

.1

1.1

0.0

0.0

38

6.7

31

6.3

13

1.1

68

.3

49

.6

15

.7

2.1

0.0

0.0





Gross credit volume by rating category

30 Jun 2016 Total: EUR 966 million

31 Dec 2015 Total: EUR 970 million

Portfolio quality declined over the reporting period. The share of investment grade in the portfolio

fell to 22 percent (31 December 2015: 32 percent) as exposures were reduced. The share in

master rating category MR 12 – 14 rose to 52 percent (31 December 2015: 43 percent) due to

the good quality of new business. Risk provisions set aside for problem loans amounted to

2.5 percent (31 December 2015: 2.0 percent).

Summary

This sub-portfolio was marked by a slightly higher volume in the customer transaction portfolio,

solid quality leveraged finance transactions and a manageable indirect exposure to monolines.

Investment risk

BayernLB does not aim to expand business activities by acquiring stakes in companies. The existing

portfolio of shareholdings will be gradually adapted to meet the needs of the realigned business

model. The goal is to retain a core of shareholdings that support the Bank’s business activities.

The Group’s strategic subsidiaries are DKB, BayernInvest and Real I.S.

The key changes in the scope of consolidation and investment portfolio in the first half of 2016

are discussed in more detail in the same-named section of the Report on the economic position.

MR 0 – 7 MR 8 – 11 MR 12– 14 MR 15 – 18 MR 19 – 21 MR 22–24 Default categories(Non-performing)Investment grade Non-Investment grade

EUR million

500

400

300

200

100

0

0.0

21

5.7

50

3.7

21

4.2

0.0 32

.1

0.0

31

0.4

41

8.4

20

7.9

0.0 33

.1


Market risk

The BayernLB Group uses several tools to monitor and limit market risks, including value-at-risk

(VaR), risk sensitivity and stress tests, all of which form part of the mix in the assessment of risk

capacity to various degrees.

VaR is used for operational management and monitoring of market risks. It is calculated using a

one-day holding period and a confidence interval of 99 percent. The historical simulation model

is the main method used at BayernLB and DKB. Customer deposits at DKB are modelled here

using the dynamic replication method.

The method for calculating pension risks (risks from pension liabilities of BayernLB) was adjusted

with effect from 30 June 2016: as part of the scenario-based approach across all risk types, the

parameters previously used to determine interest rate risk, the size of pension liabilities and

biometric risk were adjusted and refined. This relates, for example, to an additional premium for

biometric risk covering both life expectancy and the cost of medical care. The results of backtest-

ing have also been taken into account.

Market risk measurement methods are constantly checked for the quality of their forecasting. In

the backtesting process, the risk forecasts are compared with actual outcomes (gains or losses).

As at 30 June 2016, the forecasting quality of the market risk measurement methods used at

BayernLB, in accordance with the Basel traffic light approach, was classified as good. Owing to

the change in the method of aggregation (custody account A and banking book shown as corre-

lated for risk purposes), DKB does not have a sufficiently long time series to create a traffic light

report; there have been no outliers since the switch was made.

For the interest rate risk in the banking book, an interest rate shock scenario of +/ – 200 basis

points is calculated at both single entity and Group level. As at the reporting date, the calculated

change in present value relative to regulatory capital at both BayernLB and the BayernLB Group

was well below the 20 percent limit set in BaFin’s criterion for “institutions with elevated interest

rate risk”.

Within the Group, the main factor affecting total VaR is general interest rate risk. All other types

of risk play a much less significant role by comparison.





VaR contribution by risk type (confidence level 99 percent)

1 Jan 2016 to 30 Jun 2016

EUR million 30 Jun 2016 31 Dec 2015 Average Maximum Minimum

General interest rate VaR 23.1 38.0 31.3 41.9 21.0

Specific interest rate VaR (credit spreads)* 12.8 11.6 11.2 13.4 10.1

Currency VaR 4.5 3.9 4.3 6.0 2.8

Equities VaR 5.2 5.6 5.2 5.6 4.8

Commodities VaR 1.2 1.0 1.1 1.5 0.8

Volatility VaR 4.4 3.2 3.3 4.9 1.6

Total VaR* 27.3 45.8 36.6 48.1 25.3

* After eliminating intra-Group positions upon consolidation; in the risk-bearing capacity, in addition to the specific interest rate VaR, premi-ums for credit rating risk from money market transactions and OTC derivatives at BayernLB are also taken into account when calculating the risk capital requirement.

Total VaR and general interest rate VaR have fallen since 31 December 2015. This is chiefly due to

the change in the method of aggregation at DKB (custody account A and banking book shown as

correlated for risk purposes), lower volatility and changes in positions at DKB.

There were no significant changes in the other types of risk.

Liquidity risk

Liquidity overviews are drawn up each day across all currencies and separately for the major

currencies to manage and monitor liquidity risk on a consistent basis across the Group. This

involves calculating the liquidity surplus by subtracting in each maturity band the cumulative

liquidity gaps from the realisable liquidity counterbalancing capacity. A suitable limit system

takes proper account of the key variables here.

In addition, time-to-wall figures for stress scenarios are calculated, limited and monitored. These

show the length of time before the liquidity surplus turns negative under stressed conditions. For

further details on the measurement, management and monitoring of liquidity risk, please refer to

the relevant sections of the risk report as at 31 December 2015.

The methods applied Group-wide to limit and manage liquidity risk are being constantly checked

and refined, helping to optimise liquidity management.


The following tables show the outcomes of the management scenario for the BayernLB Group and

give an overview of the liquidity situation as at 30 June 2016 compared with 31 December 2015:

Liquidity situation

30 Jun 2016

Cumulative figures in EUR million

up to

1 month

up to

3 months

up to

1 year

up to

5 years

Liquidity surplus

arising from

• liquidity counterbalancing capacity

less

• liquidity gap

18,502

38,668

20,166

18,989

42,706

23,717

13,318

33,503

20,185

14,073

12,726

– 1,347

31 Dec 2015

Cumulative figures in EUR million

up to

1 month

up to

3 months

up to

1 year

up to

5 years

Liquidity surplus

arising from

• liquidity counterbalancing capacity

less

• liquidity gap

16,674

36,472

19,798

17,070

40,483

23,412

10,153

33,357

23,204

11,265

13,374

2,110

The BayernLB Group’s liquidity position was comfortable at all times during the period under

review.

The Liquidity Ordinance ratio (which must always exceed 1.0) was 1.63 at BayernLB as at 30 June

2016, having varied between 1.6 and 2.1 over the first half of 2016. The range for full-year 2015

was 1.85 to 2.29.

The Group also met the regulatory minimum Liquidity Coverage Ratio (LCR) at all times in the

reporting year through its integrated management of operational liquidity. The LCR is calculated

by comparing highly liquid assets with the net cash outflows for the following 30 days. In the

reporting period there was a regulatory requirement that highly liquid assets cover at least

70 percent of the net cash outflow. Over the next few years, the ratio will be gradually increased

to 100 percent.





The BayernLB Group’s funding structure as at 30 June 2016 compared with 31 December 2015

was as follows:

Funding structure

30 Jun 2016

31 Dec 2015

Reported values rather than economic values have been used to show the funding structure in

the BayernLB Group for the first time in the first half of 2016. The comparative figures as at

31 December 2015 have been adjusted accordingly.

In the money and capital markets the entire euro yield curve dipped sharply again as a result

of the measures taken by the ECB; at the short end, as a result of negative interest rates paid

on the deposit facility, and over the rest of the curve owing to the increased bond purchasing

programme (QE). As a result of the downward shift in interest rates, investors are trying to

avoid negative interest rates by either opting for money market-type deposit products or buying

longer bonds to achieve a minimum return. For banks, the ECB has set up Targeted Long-Term

Refinancing Operations (TLTRO II) at a minimum rate of zero percent with the prospect of the

rate falling to the level of the deposit facility for corresponding new credit business, creating

another attractive funding option.

In view of the reduced funding requirement of around EUR 5.5 billion in 2016, the priority

for BayernLB’s Treasury was once again on maintaining and extending the sources of funding,

followed by measures to optimise liabilities. In terms of issues, in the first half of 2016 BayernLB

issued a 10-year public-sector Pfandbrief with a volume of EUR 500 million, reinforced its presence

in the capital market in sterling and dollars by raising primary funds and focused on the needs of

the Asian investor base. Optimisation measures included calling and replacing a subordinated

dollar bond that was no longer eligible for regulatory purposes.

EUR million

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

9,3

99 2

2,5

91

32

,39

4

90

,42

6

9,5

58 21

,60

4

30

,65

7

88

,31

4

Mortgage Pfandbriefs

Public Pfandbriefs

“Schuldschein” note loans, notes and bonds and

other registered securities

Deposits and money market instruments


The objective is firstly to reduce excess liquidity and hence costs meaning that ECB funding is

still not an option for BayernLB Treasury. Secondly, a sufficient unsecured funding base is to be

achieved to provide positive support to the BayernLB rating when the rating agencies consider

loss given default.

Over the first half of 2016 the structure of BayernLB’s funding in maturities longer than one year

changed only marginally compared to the start of the year. In terms of issues, the modest

funding requirement resulted in a slight decline in the volume of bond issues outstanding.

The increase in deposits is significant, and given the low interest rate environment and the lack

of investment alternatives it reflects the ongoing inflow of client money and a switch in the way

BayernLB invests its own funds. BayernLB liquidity management had already made provision in

sterling for the unexpected Brexit vote, and there were no problems with short-term liquidity.

At the mid-point in the year the pro rata funding requirement had been comfortably exceeded

and only minor funding needs remained for the second half.

Following the Brexit vote, the market consensus is that the central banks will ease monetary

policy further due to the lowered economic and financial market outlook. The idea that money

market rates have not yet hit bottom and the current situation is not just a temporary phenomenon

has been increasingly driving banks to consider passing on negative rates to customers in deposit

products.

The BayernLabo funding requirement of EUR 1.5 billion largely depends on the performance of

the credit portfolio and the funding needs of the public sector which are not expected in the

short term as tax revenues have been rising. BayernLabo is therefore taking an opportunistic

approach to raising funds and keeping open the scope to issue a benchmark bond in the second

half of the year.

Despite the low interest rate environment, DKB is once again forecasting deposit growth of some

EUR 2.1 billion across all customer groups. As at 30 June 2016 growth in retail deposits at DKB

exceeded the target for the year, and taken together with the trend in corporate deposits is some

10 percent below the annual target. The planning for capital market funding for DKB for 2016

assumes a moderate EUR 1 billion requirement, which had already been exceeded on a pro rata

basis at the mid-year stage. A highlight to date was the successful DKB debut with an unsecured

Green Bond with a volume of EUR 0.5 billion and a five-year maturity. The funding structure was

further optimised, not least by exercising early call options and reducing other liabilities.

In the coming years liquidity management and monitoring at the BayernLB Group will continue

to revolve around the refinancing options available and focus on ensuring liquidity reserves are

always adequate, even in stress situations.

As well as actively managing liquidity reserves, the management of supervisory and economic

liquidity risk at BayernLB will continue to be built around a broadly-diversified refinancing

structure, supported by a reliable base of domestic investors and retail customer deposits at its

DKB subsidiary.





Operational risk

Operational risk for the calculation of risk-bearing capacity has been quantified using the

risk-sensitive operational value at risk (OpVaR) calculation. The calculation is based on losses

arising at BayernLB and DKB, external losses collected by a data consortium and scenario analyses

(potential losses) of BayernLB and DKB. It includes losses from IT and legal risks. The calculation

is based on a loss distribution approach. A confidence level of 99.95 percent is used to calculate

the OpVaR in the risk-bearing capacity. The key model assumptions and parameters used in

the model are validated once a year. The risk capital requirement as at 30 June 2016 was

EUR 500 million (31 December 2015: EUR 488 million).

The standard approach is used at BayernLB and DKB to calculate the regulatory capital backing

for operational risk.

The graph below shows the changes in operational risk losses recorded at BayernLB and DKB in

the first half of 2016 compared to financial year 2015.

Losses by Group unit

30 Jun 2016 Total: EUR 29.6 million

31 Dec 2015 Total: EUR 70.5 million

BayernLB DKB

BayernLB’s losses in the first half of 2016 still mainly relate to risks from the ongoing period of

low interest rates as these may result in negative interest rates in certain transactions with

customers that have not been contractually agreed.

The losses from operational risks at DKB in the first half of 2016 were slightly higher than in the

prior-year period. The main reasons for this increase in OpRisk losses were consumer protection

rulings ordering the repayment of processing fees and the handling of cancellation policies that

were incorrectly drawn up.

EUR million

90

80

70

60

50

40

30

20

10

030 Jun 2016 31 Dec 2015

18.9

10.7 45.4

25.1


Summary

The BayernLB Group’s risk profile remained stable in the first half of 2016.

The BayernLB Group had adequate risk-bearing capacity in the reporting period at all times. The

stress scenarios show that the BayernLB Group has adequate capital and met minimum regulatory

capital ratios in the going concern scenario when retained earnings are included. The stress

scenarios conducted also confirm that adequate capital is held.

The liquidity situation remained good. Risk provisions took appropriate account of known risks.

Regulatory solvency requirements were met. Own funds available to cover risks amounted to

EUR 10.6 billion. For more details please see “Banking supervisory capital and ratios for the

BayernLB Group” in the general section of the management report.

The risk management and controlling system at the BayernLB Group has appropriate processes

to ensure compliance with regulatory requirements while managing risks from an economic

viewpoint.





Consolidated half-yearly financial statements

62

64 Statement of comprehensive income

66 Balance sheet

68 Statement of changes in equity

70 Cash flow statement

71 Notes

107 Responsibility statement by the Board of Management

108 Review Report


Statement of comprehensive income

Income statement

EUR million Notes

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

• Interest income

• Interest expenses

Net interest income (5)

3,044

– 2,316

728

3,297

– 2,472

824

Risk provisions in the credit business (6) – 4 13

Net interest income after risk provisions 724 837

• Commission income

• Commission expenses

Net commission income (7)

309

– 190

119

297

– 188

110

Gains or losses on fair value

measurement (8) 13 – 52

Gains or losses on hedge accounting (9) – 28 – 5

Gains or losses on financial investments (10) 216 207

Administrative expenses (11) – 578 – 560

Expenses for the bank levy and deposit

guarantee scheme (12) – 93 – 147

Other income and expenses (13) 44 44

Gains or losses on restructuring (14) – 9 – 2

Profit/loss before taxes 409 433

Income taxes – 89 – 123

Profit/loss after taxes 319 310

Profit/loss attributable to non-controlling

interests – 5 –

Consolidated profit/loss 314 310



Statement of comprehensive income (condensed)

EUR million Notes

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Profit/loss after taxes as per the income statement 319 310

Components of other comprehensive income

temporarily not recognised in profit or loss

• Changes in the revaluation surplus

– Change not including deferred taxes

– Change in deferred taxes

• Currency-related changes



Components of other comprehensive income

permanently not recognised in profit or loss

• Changes due to remeasurement

of defined benefit plans



(35)

(35)

(35)

1

40

– 40

–

–

–

– 491

– 505

14

– 133

– 210

77

– 8

– 8

–

116

132

– 16

Other comprehensive income after taxes – 490 – 25

Total comprehensive income recognised

and not recognised in profit or loss

• attributable:

– to BayernLB shareholders

– to non-controlling interests

• Total comprehensive income attributable to BayernLB

shareholders:

– from continuing operations

– from discontinued operations

– 171

– 175

5

– 175

–

285

285

–

285

–



62 Consolidated half-yearly financial statements

64 Statement of comprehensive income 66 Balance sheet 68 Statement of changes in equity 70 Cash flow statement

71 Notes 107 Responsibility statement by the Board of Management 108 Review Report

Balance sheet

Assets

EUR million Notes 30 Jun 2016 31 Dec 2015

Cash reserves (15) 3,796 2,246

Loans and advances to banks (16) 33,912 29,423

Loans and advances to customers (17) 136,894 135,812

Risk provisions (18) – 2,613 – 2,746

Portfolio hedge adjustment assets 1,165 1,145

Assets held for trading (19) 19,613 17,3431

Positive fair values from derivative financial instruments

(hedge accounting) (20) 1,447 1,527

Financial investments (21) 27,912 28,852

Investment property (22) 32 35

Property, plant and equipment (23) 353 351

Intangible assets (24) 102 106

Current tax assets 58 144

Deferred tax assets 375 331

Non-current assets or disposal groups classified

as held for sale (25) 53 205

Other assets (26) 1,195 938

Total assets 224,296 215,713


1 Adjusted as per IAS 8.42 (see note 2).


Liabilities

EUR million Notes 30 Jun 2016 31 Dec 2015

Liabilities to banks (27) 60,088 60,360

Liabilities to customers (28) 89,577 86,030

Securitised liabilities (29) 40,164 34,840

Liabilities held for trading (30) 12,584 12,2861

Negative fair values from derivative financial instruments

(hedge accounting) (31) 1,570 1,354

Provisions (32) 4,854 4,300

Current tax liabilities 211 217

Deferred tax liabilities 104 4

Other liabilities (33) 389 532

Subordinated capital (34) 3,862 4,719

Equity

• Equity excluding non-controlling interests

– subscribed capital

– compound instruments (equity component)

– capital surplus

– retained earnings

– revaluation surplus

– net retained profit/net accumulated losses

• Profit/loss attributable to non-controlling interests

(35) 10,893

10,878

4,714

92

2,182

3,167

410

314

15

11,070

11,055

4,714

92

2,182

3,6601

409

–

14

Total liabilities 224,296 215,713







Statement of changes in equity

EUR million

Parent

Non- control-

ling inte-rests

Co

nso

lid

ate

d e

qu

ity

Sub

scri

bed

cap

ital

Co

mp

ou

nd

in

stru

men

ts

(eq

uit

y co

mp

on

ent)

Cap

ital

su

rplu

s

Ret

ain

ed e

arn

ing

s

Rev

alu

atio

n s

urp

lus

Cu

rren

cy t

ran

slat

ion

rese

rve

Co

nso

lidat

ed p

rofi

t/lo

ss

Equ

ity

be

fore

n

on

-co

ntr

oll

ing

in

tere

sts

As at 31 Dec 2014

Adjusted as per IAS 8

As at 1 Jan 2015

5,525

5,525

143

143

2,356

2,356

3,305

3,305

452

452

8

8

–

–

11,789

11,789

–

–

11,789

11,789

Changes in the revaluation

surplus – 133 – 133 – 133

Currency-related changes – 8 – 8 – 8

Changes due to

remeasurement of

defined benefit plans 116 116 116

Other comprehensive income 116 – 133 – 8 – 25 – 25

Consolidated profit/loss 310 310 310

Total comprehensive income 116 – 133 – 8 310 285 285

Transactions with owners – –

Capital increase/

capital decrease – –

Changes in the scope of

consolidation and Other 9 9 9

Distribution of profits – –

As at 30 Jun 2015 5,525 143 2,356 3,430 319 – 1 310 12,082 – 12,082


Details on equity can be found in note 35.


EUR million

Parent

Non- control-

ling inte-rests

Co

nso

lid

ate

d e

qu

ity

Sub

scri

bed

cap

ital

Co

mp

ou

nd

in

stru

men

ts

(eq

uit

y co

mp

on

ent)

Cap

ital

su

rplu

s

Ret

ain

ed e

arn

ing

s

Rev

alu

atio

n s

urp

lus

Cu

rren

cy t

ran

slat

ion

rese

rve

Co

nso

lidat

ed p

rofi

t/lo

ss

Equ

ity

be

fore

n

on

-co

ntr

oll

ing

in

tere

sts

As at 31 Dec 2015

Adjusted as per IAS 81

As at 1 Jan 2016

4,714

4,714

92

92

2,182

2,182

3,653

6

3,660

409

409

–

–

–

–

11,049

6

11,055

14

14

11,063

6

11,070

Changes in the revaluation

surplus 1 1 1

Currency-related changes – –

Changes due to

remeasurement of

defined benefit plans – 491 – 491 – 491

Other comprehensive income – 491 1 – 490 – 490

Consolidated profit/loss 314 314 5 319

Total comprehensive income – 491 1 314 – 175 5 – 171

Transactions with owners – –

Capital increase/

capital decrease – –


consolidation and Other – 2 – 2 – 2

Distribution of profits – – 4 – 4

As at 30 June 2016 4,714 92 2,182 3,167 410 – 314 10,878 15 10,893


Details on equity can be found in note 35.






EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Cash and cash equivalents at end of previous period 2,246 1,041

+/– cash flow from operating activities 2,297 515

+/– cash flow from investment activities 131 30

+/– cash flow from financing activities – 869 – 19

+/– exchange-rate, scope of consolidation and measurement-related

changes in cash and cash equivalents – 10 – 135

Cash and cash equivalents at end of period 3,796 1,432


Cash flow statement (condensed)


Notes

1 Notes to the half-yearly financial statements 72

2 Accounting policies

(1) Principles

(2) Changes on the previous year

(3) Scope of consolidation

72

3 Segment reporting

(4) Notes to the segment report

76

4 Notes to the statement of comprehensive income 83 (5) Net interest income

(6) Risk provisions in the credit business

(7) Net commission income

(8) Gains or losses on fair value

measurement

(9) Gains or losses on hedge accounting

(10) Gains or losses on financial investments

(11) Administrative expenses

(12) Expenses for the bank levy and

deposit guarantee scheme

(13) Other income and expenses

(14) Gains or losses on restructuring

5 Notes to the balance sheet

(15) Cash reserves

(16) Loans and advances to banks

(17) Loans and advances to customers

(18) Risk provisions

(19) Assets held for trading

(20) Positive fair values from derivative

financial instruments

(hedge accounting)

(21) Financial investments

(22) Investment property

(23) Property, plant and equipment

(24) Intangible assets

(25) Non-current assets or disposal groups

classified as held for sale

(26) Other assets

(27) Liabilities to banks

(28) Liabilities to customers

(29) Securitised liabilities

(30) Liabilities held for trading

(31) Negative fair values from derivative

financial instruments

(hedge accounting)

(32) Provisions

(33) Other liabilities

(34) Subordinated capital

(35) Equity

86

6 Notes to financial instruments

(36) Fair value of financial instruments

(37) Financial instrument measurement

categories

(38) Reclassification of financial assets

(39) Fair value hierarchy of financial

instruments

(40) Financial instruments designated

at fair value through profit or loss

(41) Derivative transactions

93

7 Supplementary information

(42) Trust transactions

(43) Contingent assets, contingent

liabilities and other commitments

(44) Administrative bodies of BayernLB

(45) Related party disclosures

(46) Events after the reporting period

102





Notes to the half-yearly financial statements

The half-yearly financial statements of the BayernLB Group as at 30 June 2016 have been pre-

pared in accordance with International Financial Reporting Standards (IFRS) pursuant to Regula-

tion (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 (including

all amendments) as well as the supplementary provisions applicable under section 315a para. 1

of the German Commercial Code (HGB). In addition to the IFRS standards, IFRS also comprise

the International Accounting Standards (IAS) and the interpretations of the IFRS Interpretations

Committee (IFRIC) and the Standing Interpretations Committee (SIC). All standards and inter-

pretations that are mandatory within the EU up to 30 June 2016 have been applied. The half-

yearly financial statements comply in particular with the requirements of IAS 34.

Unless otherwise stated, all amounts are given in EUR million and rounded up or down to the

nearest whole figure. Rounding differences may occur in the tables. Plus or minus symbols are

not inserted in front of figures except where they are needed for clarity.

Accounting policies

(1) Principles

With the exception of the changes referred to below, the accounting policies used for the half-

yearly financial statements as at 30 June 2016 were essentially the same as those used for the

2015 consolidated financial statements. Information provided in these half-yearly financial

statements is to be read in conjunction with the information in the published and audited

consolidated financial statements as at 31 December 2015. Items are recognised and measured

on a going concern basis.

Income tax expenses for the half-yearly financial statements are calculated on the basis of the

expected income tax ratio for the full year.

On 9 June 2016 the German Federal Court of Justice (BGH) handed down a ruling on the validity

of the German Master Agreement for Financial Derivatives Transactions stating that a netting

clause applicable in case of insolvency is contrary to section 104 of the German Insolvency Statute

and is therefore invalid. The subsequent general decree on netting agreements under German

insolvency law issued by the Federal Financial Supervisory Authority, which runs to 31 December

2016, specifies that netting under the existing master agreements covered by this general decree

must follow the wording of the contractual agreements until further notice. As far as the BayernLB

Group is concerned, the ruling by the Federal Court of Justice has no impact on the accounting

treatment of existing agreements in the half-yearly financial statements as at 30 June 2016.


Impact of amended and new IFRS

In financial year 2016 the following amended standards that the European Commission has incor-

porated into European law are to be applied for the first time:

• IFRS 11

The amendments to IFRS 11 “Joint Arrangements” contain guidance on the accounting for

acquisitions of interests in joint operations constituting a business as defined by IFRS 3. There

was no impact on the half-yearly financial statements of the BayernLB Group as at 30 June 2016.

• IAS 1

The amendments to IAS 1 “Presentation of Financial Statements” provide clarifications in respect

of the materiality and aggregation of items in financial statements, rules on the presentation of

subtotals in the balance sheet and statement of comprehensive income, the structure of the no-

tes and the information on the significant accounting policies applied. In addition, interests in

companies measured at equity must be recognised as a separate item in other comprehensive

income.

• IAS 16 and IAS 38

The amendments to IAS 16 “Property, Plant and Equipment” and IAS 38 “Intangible Assets” pro-

hibit the use of a revenue-based depreciation method for property, plant and equipment and

clarify that a revenue-based amortisation method is appropriate only in certain circumstances

for intangible assets. The changes had no impact on the half-yearly financial statements of the

BayernLB Group as at 30 June 2016.

• IAS 16 and IAS 41

The amendments to IAS 16 “Property, Plant and Equipment” and IAS 41 “Agriculture” deal with

accounting for bearer plants. There was no impact on the half-yearly financial statements of the

BayernLB Group as at 30 June 2016.

• IAS 19

The amendments to IAS 19 “Employee Benefits” specify that contributions from employees to

defined benefit plans in the period in which the related service was rendered may be deducted

from the current service cost provided that the contributions are not linked to the number of

service years. For the BayernLB Group these amendments had no impact on the half-yearly

financial statements as at 30 June 2016.

• IAS 27

The amendment to IAS 27 “Separate Financial Statements” allows the equity method to be

applied in separate financial statements. There was no impact on the half-yearly financial

statements of the BayernLB Group as at 30 June 2016.





• Improvements to IFRS – 2010 – 2012 cycle and 2012 – 2014 cycle

As part of its Annual Improvement Cycle of the IFRSs, the IASB published several changes

including minor consequential amendments to standards IFRS 2 “Share-based Payment”, IFRS 3

“Business Combinations”, IFRS 5 “Non-Current Assets Held for Sale and Discontinued Opera-

tions”, IFRS 7 “Financial Instruments: Disclosures”, IFRS 8 “Operating Segments”, IAS 16

“ Property, Plant and Equipment”, IAS 19 “Employee Benefits”, IAS 24 “Related Party Disclosures”,

IAS 34 “Interim Financial Reporting”, and IAS 38 “Intangible Assets”. The changes had no impact

on the half-yearly financial statements of the BayernLB Group as at 30 June 2016.

Amended or new standards not yet incorporated into European law were not applied to these

half-yearly financial statements.

(2) Changes on the previous year

Changes under IAS 8.32 et seq.

In the period under review the BayernLB Group made changes to estimates of measurement

parameters for calculating liabilities under IAS 19 and refined measurement methods. The

changes in measurement produced a total charge of EUR 567 million, reducing retained earnings

by EUR 553 million. Of this amount, the update in the discount rate for pension obligations

accounted for EUR – 536 million, the increase in estimated future medical costs for pension obli-

gations for EUR – 70 million, estimated future pension costs for EUR 5 million, estimated future

social insurance pensions for EUR 62 million and the refinement of measurement methods for

EUR – 14 million. The change in the discount rate and the increase in estimated future medical

costs for restructuring liabilities had an impact of EUR – 13 million on gains or losses on restruc-

turing. The reduction in the discount rate and the income trend for liabilities from jubilee

benefits increased staff costs by EUR 1 million. Due to adjustments, pension obligations rose by

EUR 553 million, restructuring liabilities by EUR 13 million and liabilities from jubilee benefits by

EUR 1 million. The changes in estimates and refinement of measurement methodology will also

have an impact on future periods which currently cannot be reliably estimated.

Changes under IAS 8.41 et seq.

Fair value adjustments were not correctly calculated in the 2015 consolidated financial state-

ments due to an incorrect selection of risk factors. As a result, assets held for trading were under-

stated by EUR 2 million and liabilities held for trading were overstated by EUR 4 million. Further-

more, gains or losses on fair value measurement and gains or losses on hedge accounting were

understated by a total of EUR 6 million as at 31 December 2015. The resultant adjustments to

consolidated profit were offset against retained earnings. There were additional effects of an

immaterial amount in the positive and negative fair values from derivative financial instruments

(hedge accounting). The impact of these changes on the main balance sheet items of the year

before is shown in the following overview:


Impact on the affected balance sheet items as at 31 December 2015

EUR million

31 Dec 2015

before

adjustment Adjustment

31 Dec 2015

after adjustment

Assets

• Assets held for trading 17,342 2 17,343

Liabilities

• Liabilities held for trading 12,290 – 4 12,286

• Equity 11,063 6 11,070

– Equity excluding non-controlling interests 11,049 6 11,055

– Retained earnings 3,653 6 3,660

The disclosures in the notes regarding fair value, measurement category and the fair value

hierarchy of the financial instruments and derivatives transactions are also affected. The previous

year’s figures have been restated accordingly.

Within the breakdown of liabilities to customers by product in the consolidated financial state-

ments for 2015, other liabilities were reported as EUR 25 million too high, and overnight and

time deposits too low by a similar amount. The previous year’s figures have been restated

accordingly.

Moreover, the maximum credit risk of the financial assets that are impaired was understated by

EUR 4 million in the management report (risk report) in the 2015 consolidated financial state-

ments. When allocating the maximum credit risk to the balance sheet items, there were shifts

between loans and advances to banks (EUR 374 million), loans and advances to customers

(EUR – 554 million), assets held for trading (EUR 238 million), contingent liabilities (EUR – 22 million)

and irrevocable loan commitments (EUR – 32 million). Furthermore, the fair value collateral for

impaired financial assets was overstated by EUR 199 million and that for financial assets past due

but not impaired overstated by EUR 6 million. The previous year’s figures have been restated

accordingly.

(3) Scope of consolidation

Besides the parent company, the group of companies consolidated within BayernLB comprises 14

(31 December 2015: 13) subsidiaries that are consolidated in accordance with IFRS 10.

As before, it does not include any companies measured at equity.





Changes in the consolidated sub-group of Real I.S. AG Gesellschaft für Immobilien

Assetmanagement

As from 1 January 2016, Real I.S. Investment GmbH, Munich was included for the first time in

the new sub-group financial statements of Real I.S. AG Gesellschaft für Immobilien Assetmanage-

ment, Munich. The sub-group has been set up to provide uniform management of business activi-

ties and give a more accurate presentation of the financial performance and financial position of

Real I.S. AG. Real I.S. Investment GmbH is likewise an investment company under section 1 (16)

of the Capital Investment Code (KAGB). Its activities include managing German investment funds,

EU investment funds, foreign AIFs (collective asset management) and real estate funds. This had

no material impact on the consolidated financial statements.

Determining the scope of consolidation

BayernLB’s scope of consolidation is determined by materiality criteria. 125 (31 December 2015:

125) companies were not consolidated or measured at equity due to their negligible importance

individually or collectively to the financial position and financial performance of the Group. The

impact on the balance sheet from the contractual relationships between Group companies and

these non-consolidated companies is reported in the half-yearly financial statements.

Segment reporting

(4) Notes to the segment report

The segment report reflects the business structure of the BayernLB Group. A total of six segments

are shown comprising the operating business segments, the Central Areas & Others segment,

including the Consolidation column, and the Non-Core Unit. The earnings of the consolidated

subsidiaries and units are also allocated to the segment to which they have been assigned.

Segment reporting is based on IFRS 8 and therefore on the monthly management reports to the

Board of Management, which serves as the chief operating decision-maker as defined by IFRS 8.7.

The management reports – and therefore the segmentation – are based on the accounting poli-

cies used in the consolidated financial statements under IFRS. Segment reporting does not there-

fore need to be reconciled with the IFRS accounting policies used in the consolidated financial

statements. The earnings contributions reported under the segments are generated largely from

banking transactions and financial services. Net interest income and net commission income are

shown respectively as net figures comprising interest income and interest expenses and commis-

sion income and commission expenses. The additional information about products and services

required under IFRS 8.32 and on non-current assets by geographical region required under IFRS

8.33 (b) is not available and the costs of providing the information would be excessive.

The business segments are unchanged from the previous year: Corporates & Mittelstand, Real

Estate & Savings Banks/Association, Deutsche Kreditbank (DKB) and Financial Markets. In addi-

tion, there are the Central Areas & Others and the Non-Core Unit segments.


In line with the BayernLB Group business model, some adjustments have been made to the alloca-

tions to the Deutsche Kreditbank (DKB), Central Areas & Others and Non-Core Unit segments

compared to 30 June 2015. The subsidiary Bayern Card-Services GmbH - S-Finanzgruppe, Munich

(BCS) was consolidated for the first time on 1 January 2015 and assigned to the DKB segment.

The earnings contributions from the holding in BCS were previously reported under the Central

Areas & Others segment. The stake in gewerbegrund Projektentwicklungsgesellschaft (gpe) mbH,

Munich is no longer part of the core business. Accordingly, the holding and associated business

relationships are now reported in the Non-Core Unit segment. In the half-yearly financial state-

ments as at 30 June 2015 the earnings contributions were still included in the Central Areas &

Others segment.

The segment figures for the comparison period have been adjusted in accordance with the new

structure.

In accordance with internal management reporting, the Central Areas & Others segment and the

Consolidation column are aggregated and shown in a separate table. The Consolidation column

shows consolidation entries that are not allocated to the segments. These mainly relate to meas-

urement results in the net interest income, gains or losses on fair value measurement and other

income and expenses items. These mainly arise from differences in the way internal Group trans-

actions are measured and the application of hedge accounting to cross-divisional derivatives

transactions.

The risk-weighted assets (RWA) shown include the figures on the reporting date for credit risk,

market risk positions and operational risk. Since the beginning of financial year 2016, what is

shown as equity is no longer reported equity but regulatory equity (Common Equity Tier 1)

calculated according to the relevant supervisory rules. For the purposes of internal management,

economic capital is allocated to the segments in the amount of 11.5 percent of risk weighted

assets (RWA). Economic capital is reconciled to regulatory equity in the column headed

“ Consolidation”.

The return on equity (RoE) shown is calculated as the ratio of profit before taxes to regulatory

equity (Group) or allocated economic capital (at segment level). The cost/income ratio (CIR) is

the ratio of administrative expenses to the sum of net interest income, net commission income,

gains or losses on fair value measurement, gains or losses on hedge accounting, gains or losses

on financial investments and other income and expenses.

The segment figures for the comparison period have been adjusted to reflect the changes in

reported equity and return on equity.





Segment reporting as at 30 June 2016

EUR million Co

rpo

rate

s &

Mit

tels

tan

d

Re

al

Esta

te &

Sa

vin

gs

Ba

nk

s/A

sso

cia

tio

n

DK

B

Fin

an

cia

l M

ark

ets

Ce

ntr

al

Are

as

&

Oth

ers

(in

clu

din

g

Co

nso

lid

ati

on

)

No

n-C

ore

Un

it

Gro

up

Net interest income 150 118 386 – 10 47 38 728

Risk provisions in the

credit business 22 11 – 52 – – 15 – 4

Net commission income 51 47 4 17 – 3 2 119

Gains or losses on

fair value measurement 24 35 27 – 39 – 27 – 8 13

Gains or losses on

hedge accounting – 5 – 35 2 – – – 28

Gains or losses on

financial investments – – 141 56 12 7 216

Administrative expenses – 131 – 97 – 207 – 100 – 10 – 32 – 578


and deposit guarantee

scheme – – – 22 – – 71 – – 93

Other income and expenses – 1 20 26 – 1 – 3 44

Gains or losses on

restructuring – – – – – 7 – 2 – 9

Profit/loss before taxes 118 119 263 – 49 – 60 17 409

Risk-weighted assets (RWA) 22,368 7,167 24,434 9,373 1,797 3,262 68,400

Average economic/

regulatory equity 2,540 822 2,824 1,043 1,144 415 8,787

Return on equity (RoE) (%) 9.3 28.9 18.6 – 9.3 – 8.2 9.3

Cost/income ratio (CIR) (%) 57.7 47.3 38.1 193.3 – 89.3 52.9

Average number of

employees (FTE) 344 442 3,165 586 1,779 102 6,418


Segment reporting as at 30 June 20151

EUR million Co

rpo

rate

s &

Mit

tels

tan

d

Re

al

Esta

te &

Sa

vin

gs

Ba

nk

s/A

sso

cia

tio

n

DK

B

Fin

an

cia

l M

ark

ets

Ce

ntr

al

Are

as

&

Oth

ers

(in

clu

din

g

Co

nso

lid

ati

on

)

No

n-C

ore

Un

it

Gro

up

Net interest income 154 114 387 81 51 38 824

Risk provisions in the

credit business 52 18 – 34 – – – 23 13

Net commission income 56 42 – 9 18 – 3 6 110

Gains or losses on

fair value measurement 30 19 8 28 – 39 – 98 – 52

Gains or losses on

hedge accounting – – 1 – 21 15 2 – – 5

Gains or losses on

financial investments – – 7 88 94 18 207

Administrative expenses – 119 – 92 – 180 – 91 – 6 – 72 – 560


and deposit guarantee

scheme – – – 9 – – 137 – – 147

Other income and expenses 2 – 2 5 9 15 14 44

Gains or losses on

restructuring – – – – 2 – 4 – 2

Profit/loss before taxes 175 98 154 149 – 22 – 121 433

Risk-weighted assets (RWA) 21,688 7,349 25,144 8,820 1,677 7,199 71,876

Average economic/

regulatory equity 2,557 933 2,912 1,129 1,172 887 9,590

Return on equity (RoE) (%) 13.7 21.0 10.6 26.4 – – 27.2 9.0

Cost/income ratio (CIR) (%) 49.2 53.7 47.7 37.8 – – 331.1 49.6

Average number of

employees (FTE) 344 456 2,841 572 1,800 196 6,209

1 Adjusted as per IFRS 8.29.





Breakdown of the aggregated Central Areas & Others segment results and consolidation entries not allocated

to the segments as at 30 June 2016

EUR million Ce

ntr

al A

reas

&O

the

rs

Co

nso

lid

atio

n

Ce

ntr

al A

reas

&O

the

rs (

incl

ud

ing

C

on

soli

dat

ion

)

Net interest income 22 25 47

Net commission income – 3 – – 3

Gains or losses on fair value measurement – 2 – 25 – 27

Gains or losses on hedge accounting – – –

Gains or losses on financial investments 12 – 12

Administrative expenses – 13 2 – 10

Expenses for the bank levy and deposit guarantee scheme – 71 – – 71

Other income and expenses 2 – 2 – 1

Gains or losses on restructuring – 7 – – 7

Profit/loss before taxes – 60 – – 60

Risk-weighted assets (RWA) 1,797 – 1,797

Average economic/regulatory equity 220 924 1,144

Breakdown of the aggregated Central Areas & Others segment results and consolidation entries not allocated

to the segments as at 30 June 20151

EUR million Ce

ntr

al A

reas

&O

the

rs

Co

nso

lid

atio

n

Ce

ntr

al A

reas

&O

the

rs (

incl

ud

ing

C

on

soli

dat

ion

)

Net interest income 34 17 51

Net commission income – 3 – – 3

Gains or losses on fair value measurement – 24 – 15 – 39

Gains or losses on hedge accounting 2 – 2

Gains or losses on financial investments 92 2 94

Administrative expenses – 8 2 – 6

Expenses for the bank levy and deposit guarantee scheme – 137 – – 137

Other income and expenses 22 – 7 15

Gains or losses on restructuring 2 – 2

Profit/loss before taxes – 21 – 1 – 22

Risk-weighted assets (RWA) 1,677 – 1,677

Average economic/regulatory equity 173 999 1,172

1 Adjusted as per IFRS 8.29.


Notes on delimitation of segments

The Corporates & Mittelstand segment serves large German Mittelstand companies, large German

corporations and international companies with a connection to Germany. Its clients include in

particular DAX and MDAX-listed companies and family-owned or operated businesses which con-

duct international business from their German home market. To better serve clients’ export and

trade finance needs as well as provide payment services, this segment also includes relationships

with banks in emerging markets. In addition, it conducts the syndicated loan business together

with the Bavarian savings banks for their corporate customers. The following core activities are

located in this segment: traditional loan financing (including working capital, capex and trade

financing), leasing finance and global project and export financing for customers worldwide with

a focus on the infrastructure, energy and renewable energy sectors. It also acts as lead manager

for its customers in syndicated loans and plays a leading role in successfully placing corporate

bonds and Schuldschein note loans on the market in cooperation with the Financial Markets

business area.

The Real Estate & Savings Banks/Association segment incorporates business with commercial and

residential real estate customers, the savings banks and the public sector. In addition, the legally

dependent institution Bayerische Landesbodenkreditanstalt, Munich (BayernLabo) is allocated

to this segment. The Real Estate division focuses on long-term commercial real estate financing

in Bavaria and Germany and business with residential construction companies and residential

property developers. BayernLB offers commercial real estate customers a comprehensive range

of services related to real estate financing. The Savings Banks & Association division now forms

the central hub for collaboration with savings banks and public sector customers in Germany. Its

activities include BayernLB’s business with savings banks in Germany, particularly Bavaria, and the

state-subsidised loan business. The savings banks are a fundamental part of BayernLB’s business

model as both customers and as sales partners. The division also serves state and municipal cus-

tomers and public entities in Germany which BayernLB, as a partner, provides with a wide range

of products and tailor-made solutions. BayernLabo is responsible for the non-competitive residen-

tial construction and urban development business under public mandate on behalf of BayernLB.

It also provides financing for local authorities in Bavaria.

The DKB segment consists of the core business activities of the Deutsche Kreditbank Aktiengesell-

schaft, Berlin (DKB) sub-group. It also include the consolidated subsidiary Bayern Card-Services

GmbH – S-Finanzgruppe, Munich (BCS). In retail banking, DKB operates as an internet bank pro-

viding standardised products at transparent conditions. In addition, its business activities include

the infrastructure and corporate customers markets. It specialises here largely in promising

sectors with long-term growth potential such as residential property, healthcare, education and

research, agriculture as well as renewable energy. BCS’s business activities are focused on credit

card services.





The Financial Markets segment comprises the business area of the same name and the consoli-

dated subsidiaries BayernInvest Kapitalverwaltungsgesellschaft mbH, Munich and Real I.S. AG

Gesellschaft für Immobilien Assetmanagement, Munich. The Financial Markets business area

combines all trading and issuing activities as well as asset and liability management. Related

to this, BayernLB’s business relationships with banks in developed markets, insurers and other

institutional customers, which are primarily focused on capital market-oriented products, are

allocated to this business area. The Financial Markets segment also provides a range of capital

market and Treasury products that are cross-sold to BayernLB’s Corporates, Mittelstand, Savings

Banks and Real Estate customers. Market and default risks are hedged and solvency assured at

all times through risk and liquidity management.

The Central Areas & Others segment is aggregated with the Consolidation column in accordance

with internal management reporting. It comprises earnings contributions from the central areas

Corporate Center, Financial Office, Operating Office and Risk Office. The segment also includes

core business transactions that cannot be allocated to either a business area or a central area.

The consolidated subsidiary BayernLB Capital LLC I, Wilmington is also allocated to this segment.

The Consolidation column includes consolidation entries not allocated to any segment.

All non-core activities have been transferred to the Non-Core Unit segment. It contains the

Restructuring Unit, the non-core activities of DKB, the Other NCU sub-segment, including the

consolidated subsidiary Banque LBLux S.A. in Liquidation, Luxembourg, and the loans to HETA

Asset Resolution AG, Klagenfurt, including their funding.

Income from typical banking operations after risk provisioning (net interest income, net commis-

sion income, gains or losses on fair value measurement, gains or losses on hedge accounting, gains

or losses on financial investments) totalled EUR 1,045 million (30 June 2015: EUR 1,097 million),

of which EUR – 5 million (30 June 2015: EUR 67 million) relates to Europe excluding Germany,

and EUR 39 million (30 June 2015: EUR 81 million) to America. Of the risk-weighted assets (RWA)

in the amount of EUR 68,400 million (30 June 2015: EUR 71,876 million) recognised instead of

non-current assets, EUR 1,130 million (30 June 2015: EUR 2,244 million) relate to Europe excluding

Germany and EUR 2,413 million (30 June 2015: EUR 2,655 million) relate to America.


Notes to the statement of comprehensive income

(5) Net interest income

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Interest income

• From lending and money market transactions

• From bonds, notes and other fixed-income securities

• Current income from equities and other non-fixed income securities

• Current income from interests in non-consolidated subsidiaries,

joint ventures, associates and other interests

• Current income from profit-pooling and profit transfer agreements

• Current income from other financial investments

• From hedge accounting derivatives

• From derivatives in economic hedges

3,044

1,954

116

2

6

2

5

395

564

3,297

2,164

162

2

6

2

6

452

503

Interest expenses

• For liabilities to banks and customers

• For securitised liabilities

• For subordinated capital

• For hedge accounting derivatives

• For derivatives in economic hedges

• Other interest expenses

2,316

919

213

76

531

511

65

2,472

1,043

249

99

609

420

52

Total 728 824

Net interest income includes a negligible amount of negative interest.

(6) Risk provisions in the credit business

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Additions 221 179

Direct writedowns 9 7

Releases 167 137

Recoveries on written down receivables 54 59

Other gains or losses on risk provisions 5 3

Total 4 – 13

The amounts include on-balance sheet and off-balance sheet lending business.





(7) Net commission income

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Securities business 32 33

Broker fees – 5 – 6

Lending business 73 74

Payments – 22 – 23

Foreign commercial operations 1 1

Trust transactions 9 9

Miscellaneous 33 22

Total 119 110

(8) Gains or losses on fair value measurement

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Net trading income

• Interest-related transactions

• Equity-related and index-related transactions and transactions

with other risks

• Currency-related transactions

• Credit derivatives

• Other financial transactions

• Refinancing of trading portfolios

• Trading-related commission

20

18

– 14

10

1

13

–

– 8

– 60

34

4

– 109

– 1

22

– 4

– 6

Fair value gains or losses from the fair value option – 7 8

Total 13 – 52

(9) Gains or losses on hedge accounting

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Gains or losses on micro fair value hedges

• Measurement of underlying transactions

• Measurement of hedging instruments

8

67

– 59

16

188

– 171

Gains or losses on portfolio fair value hedges

• Measurement of underlying transactions

• Amortisation of the portfolio hedge adjustment

• Measurement of hedging instruments

– 35

271

– 251

– 56

– 21

– 47

– 254

280

Total – 28 – 5


(10) Gains or losses on financial investments

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Gains or losses on financial investments in the loans and

receivables category

• Gains or losses on sales

• Income from impairment reversals

1

1

–

1

–

1

Gains or losses on financial investments in the available-for-sale

category

• Gains or losses on sales

• Expenses from impairments

215

216

1

206

228

22

Total 216 207

(11) Administrative expenses

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Staff costs

• Salaries and wages

• Social security contributions

• Expenses for pensions and other employee benefits

326

259

33

34

300

234

29

36

Other administrative expenses 231 241

Amortisation and depreciation of property, plant and equipment

and intangible assets (not including goodwill) 20 19

Total 578 560

(12) Expenses for the bank levy and deposit guarantee scheme

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Expenses for the bank levy 51 99

Expenses for the deposit guarantee scheme 42 47

Total 93 147

(13) Other income and expenses

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Other income 103 207

Other expenses 60 163

Total 44 44





(14) Gains or losses on restructuring

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Income from restructuring measures 8 –

Expenses for restructuring measures 17 2

Total – 9 – 2

Notes to the balance sheet

(15) Cash reserves


Cash 135 51

Deposits with central banks 3,661 2,195

Total 3,796 2,246

(16) Loans and advances to banks


Loans and advances to domestic banks 23,835 20,876

Loans and advances to foreign banks 10,077 8,547

Total 33,912 29,423

(17) Loans and advances to customers


Loans and advances to domestic customers 111,315 111,351

Loans and advances to foreign customers 25,579 24,462

Total 136,894 135,812

(18) Risk provisions


Specific loan loss provisions 2,468 2,518

Portfolio provisions 144 228

Total 2,613 2,746


Changes in specific loan loss provisions

EUR million

Loans and advances

to banks

Loans and advances

to customers Total

2016 2015 2016 2015 2016 2015

As at 1 Jan 113 520 2,405 2,344 2,518 2,864

Changes recognised in

income statement

• Additions

• Releases

• Unwinding

– 2

–

2

–

1

1

–

–

126

211

64

20

53

166

92

22

125

211

66

20

53

167

92

22

Changes not recognised

in income statement

• Currency-related changes

• Utilisation

• Transfers/ other changes

– 98

–

–

– 98

2

2

–

–

– 77

– 17

164

105

– 55

84

142

4

– 175

– 18

164

7

– 52

86

142

4

As at 30 Jun 14 522 2,455 2,342 2,468 2,865

Changes in portfolio provisions

EUR million

Loans and advances

to banks

Loans and advances

to customers Total

2016 2015 2016 2015 2016 2015

As at 1 Jan 94 9 134 166 228 175

Changes recognised in

income statement

• Additions

• Releases

– 34

1

35

2

2

–

– 40

10

50

– 21

7

29

– 74

10

85

– 19

9

29

Changes not recognised

in income statement

• Utilisation

• Transfers/other changes

– 49

–

– 49

–

–

–

40

9

49

– 6

6

–

– 9

9

–

– 6

6

–

As at 30 Jun 10 11 134 139 144 149

Risk provisions for contingent liabilities and other commitments are shown as provisions for risks

in the credit business (see note 32).





(19) Assets held for trading


Bonds, notes and other fixed-income securities 3,221 2,313

Equities and other non-fixed income securities 238 277

Receivables held for trading 1,264 1,029

Positive fair values from derivative financial instruments

(not hedge accounting) 14,890 13,7241

Total 19,613 17,343


(20) Positive fair values from derivative financial instruments (hedge accounting)


Positive fair values from micro fair value hedges 1,447 1,527

Total 1,447 1,527

(21) Financial investments


Financial investments in the fair value option category

• Bonds, notes and other fixed-income securities

• Equities and other non-fixed income securities

• Interests in non-consolidated subsidiaries, joint ventures,

associates and other interests

199

10

78

111

218

11

73

134

Financial investments in the loans and receivables category


266

266

343

343

Financial investments in the available-for-sale category


• Equities and other non-fixed income securities

• Interests in non-consolidated subsidiaries, joint ventures,

associates and other interests

• Other financial investments

27,447

26,776

207

312

153

28,291

27,610

218

311

151

Total 27,912 28,852

(22) Investment property


Land and buildings for rental 32 35

Total 32 35


(23) Property, plant and equipment


Owner-occupied property 320 322

Furniture and office equipment 33 30

Total 353 351

(24) Intangible assets


Intangible assets produced in house 71 77

Other intangible assets 31 29

Total 102 106

(25) Non-current assets or disposal groups classified as held for sale


Loans and advances to customers – 51

Assets held for trading – 3

Financial investments 53 151

Total 53 205

BayernLB’s shares in Visa Europe Limited, London held as a financial investment were classified

as held for sale in the previous year. The takeover by Visa Inc., San Francisco, was completed on

21 June 2016.

(26) Other assets


Emissions certificates 408 440

Precious metals 364 96

Claims from reinsurance 217 218

Pre-paid expenses 21 13

Other assets 185 170

Total 1,195 938





(27) Liabilities to banks


Liabilities to domestic banks 51,506 50,792

Liabilities to foreign banks 8,582 9,568

Total 60,088 60,360

Liabilities to banks by product


Schuldschein note loans/issues

• Schuldschein note loans

• Registered public Pfandbriefs issued

• Mortgage Pfandbriefs issued

• Other registered securities

5,822

2,929

910

688

1,295

6,123

2,961

1,362

544

1,257

Book-entry liabilities

• Pass-through business/subsidised loans

• Overnight and time deposits

• Current account liabilities

• Securities repurchase transactions

• Other liabilities

54,265

31,018

14,589

5,279

1,815

1,565

54,238

31,097

12,425

5,671

2,065

2,979

Total 60,088 60,360

(28) Liabilities to customers


Liabilities to domestic customers 82,319 80,000

Liabilities to foreign customers 7,259 6,029

Total 89,577 86,030

Liabilities to customers by product


Schuldschein note loans/issues

• Schuldschein note loans

• Registered public Pfandbriefs issued

• Mortgage Pfandbriefs issued

• Other registered securities

22,415

3,049

9,079

3,720

6,567

22,157

3,192

8,974

3,809

6,183

Book-entry liabilities

• Overnight and time deposits

• Current account liabilities

• Securities repurchase transactions


67,162

39,873

25,074

530

1,684

63,873

38,9031

24,310

–

6601

Total 89,577 86,030



(29) Securitised liabilities


Bonds and notes issued

• Mortgage Pfandbriefs

• Public Pfandbriefs

• Other bonds

36,147

4,991

12,602

18,553

33,539

5,206

11,268

17,066

Other securitised liabilities 4,017 1,301

Total 40,164 34,840

The reporting period saw the issue of debt instruments (including money market securities) to

the value of EUR 33,527 million. Repurchases and redemptions amounted to EUR 696 million and

EUR 27,714 million respectively.

(30) Liabilities held for trading


Trading portfolio liabilities 659 643

Negative fair values from derivative financial instruments

(not hedge accounting) 11,925 11,6431

Total 12,584 12,286


(31) Negative fair values from derivative financial instruments (hedge accounting)


Negative fair values from micro fair value hedges 1,215 8781

Negative fair values from portfolio fair value hedges 355 476

Total 1,570 1,354


(32) Provisions


Provisions for pensions and similar obligations 4,124 3,602

Other provisions

• Provisions in the credit business

• Restructuring provisions

• Miscellaneous provisions

730

78

275

377

699

92

292

314

Total 4,854 4,300

The size of each provision corresponds to the best, i.e. uncertain, estimate of the amount of the

obligation which is likely to be utilised.





(33) Other liabilities


Accruals 273 291

Deferred income 28 28

Other liabilities 88 213

Total 389 532

(34) Subordinated capital


Subordinated liabilities 3,381 2,950

Profit participation certificates (debt component) 388 372

Dated silent partner contributions (debt component) 22 1,322

Hybrid capital 71 76

Total 3,862 4,719

The fall in dated silent partner contributions relates to the EUR 1,300 million partial termination

of the contribution from the Free State of Bavaria.

(35) Equity


Equity excluding non-controlling interests 10,878 11,055

Subscribed capital 4,714 4,714

• Statutory nominal capital 2,800 2,800

• Capital contribution 612 612

• Perpetual silent partner contributions 1,302 1,302

Compound instruments 92 92

• Profit participation certificates (equity component) 80 80

• Dated silent partner contributions (equity component) 11 11

Capital surplus 2,182 2,182

Retained earnings 3,167 3,660

• Statutory reserve 1,268 1,268

• Other retained earnings 1,900 2,3921

Revaluation surplus 410 409

Consolidated profit/loss 314 –

Non-controlling interests 15 14

Total 10,893 11,070



As they are compound financial instruments, dated silent partner contributions, silent partner

contributions that are callable by the lender and profit participation certificates, must be divided

into their equity and debt components (split accounting). The equity component, being a residual

claim for the purposes of IAS 32.11, is equivalent to the net present value of expected future dis-

tributions. As no half-yearly distributions are made, the amount of the equity component – with

the exception of repurchases and resales in the first half of 2016 – corresponds to the value as at

31 December 2015. For a detailed description of the accounting methodology, see note 23 of the

2015 annual report.

Notes to financial instruments

(36) Fair value of financial instruments

Fair value

Carrying

amount Fair value

Carrying

amount

EUR million 30 Jun 2016 30 Jun 2016 31 Dec 2015 31 Dec 2015

Assets

• Cash reserves

• Loans and advances to banks1

• Loans and advances to customers1

• Assets held for trading

• Positive fair values from derivative financial

instruments (hedge accounting)

• Financial investments

• Non-current assets or disposal groups

classified as held for sale

3,796

33,943

142,768

19,613

1,447

27,926

53

3,796

33,912

136,894

19,613

1,447

27,912

53

2,246

29,814

140,245

17,3432

1,527

28,863

205

2,246

29,423

135,812

17,3432

1,527

28,852

205

Liabilities

• Liabilities to banks

• Liabilities to customers

• Securitised liabilities

• Liabilities held for trading

• Negative fair values from derivative financial

instruments (hedge accounting)

• Subordinated capital

61,917

92,490

40,959

12,584

1,570

4,045

60,088

89,577

40,164

12,584

1,570

3,862

61,707

88,332

35,344

12,2862

1,354

4,816

60,360

86,030

34,840

12,2862

1,354

4,719

1 Carrying amount before deducting risk provisions for loans and advances to banks in the amount of EUR 24 million (31 December 2015:

EUR 207 million) and loans and advances to customers in the amount of EUR 2,589 million (31 December 2015: EUR 2,539 million).






(37) Financial instrument measurement categories


Assets

• Financial assets at fair value through profit or loss– held-for-trading financial assets

assets held for tradingnon-current assets or disposal groups classified as held for sale

– fair value optionloans and advances to banksloans and advances to customersfinancial investments

• Loans and receivables– cash reserves– loans and advances to banks1

– loans and advances to customers1

– financial investments– non-current assets or disposal groups classified as held for sale

• Available-for-sale financial assets– loans and advances to customers– financial investments– non-current assets or disposal groups classified as held for sale

• Positive fair values from derivative financial instruments (hedge accounting)

20,10919,61319,613

– 496

– 297199

174,5613,796

33,912136,587

266–

27,51111

27,44753

1,447

18,27117,34717,3432

3924

3703218

167,1572,246

29,420135,097

34351

28,45512

28,291151

1,527

Liabilities

• Financial liabilities at fair value through profit or loss– held-for-trading financial liabilities

liabilities held for trading– fair value option

liabilities to banksliabilities to customerssecuritised liabilitiessubordinated capital

• Financial liabilities measured at amortised cost– liabilities to banks– liabilities to customers– securitised liabilities– subordinated capital

• Negative fair values from derivative financial instruments (hedge accounting)

20,54512,58412,584

7,961252

3,6564,006

48185,730

59,83685,92136,158

3,815

1,570

20,19412,28612,2862

7,908236

3,7733,852

46178,042

60,12482,25730,988

4,673

1,354

1 Not including deduction of risk provisions.



(38) Reclassification of financial assets

Pursuant to the amendments by the International Accounting Standards Board to IAS 39 and

IFRS 7 “Reclassification of Financial Assets” and to Commission Regulation (EC) No 1004/2008,

BayernLB reclassified certain available-for-sale securities as loans and receivables as at 1 July

2008. There were no other reclassifications during the reporting period.

The fair values and the carrying amounts of the reclassified securities at the end of the reporting

period in accordance with IAS 39 in conjunction with IFRS 7.12A (b) were:

Fair value

Carrying

amount Fair value

Carrying

amount

EUR million 30 Jun 2016 30 Jun 2016 31 Dec 2015 31 Dec 2015

Available-for-sale securities reclassified as loans

and receivables 280 266 354 343

Total 280 266 354 343

As at the reporting date the nominal volume of the reclassified securities was EUR 243 million

(31 December 2015: EUR 318 million).

In the following table, in accordance with IAS 39 in conjunction with IFRS 7.12A, the changes in

value, whether recognised or not in profit or loss, as well as current income, are shown “without

reclassification” as compared with the corresponding “with reclassification” values. All earnings

effects including current earnings components have been recognised.

Without

reclassi-

fication1

With

reclassi-

fication2

Without

reclassi-

fication1

With

reclassi-

fication2

EUR million

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

1 Jan –

30 Jun 2015

Reclassification from the available-for-sale

category

• Net interest income

• Gains or losses on hedge accounting

• Gains or losses on financial investments

• Change in the revaluation surplus

7

– 1

1

5

7

– 1

1

1

30

– 15

–

– 15

31

– 15

1

1

Total 12 8 1 18

1 Taking account of categories before reclassification.

2 Taking account of categories after reclassification.





(39) Fair value hierarchy of financial instruments

The fair value hierarchy divides the inputs used to measure the fair value of financial instruments

into three levels:

• Unadjusted quoted prices for identical financial instruments in active markets that the BayernLB

Group can access at the measurement date (Level 1)

• Inputs other than quoted prices included within Level 1 that are observable either directly or

indirectly, i.e. quoted prices for similar financial instruments in active markets, quoted prices

in markets that are not active, other observable inputs that are not quoted prices, and market-

corroborated inputs (Level 2) and

• Unobservable inputs (Level 3)

Financial instruments measured at fair value

In the overviews below, financial instruments recognised at fair value in the balance sheet are

classified according to whether they are measured with prices quoted on active markets (Level 1),

their fair value is calculated using measurement methods whose key inputs can be directly or

indirectly observed (Level 2) or are not based on observable market data (Level 3).

EUR million

Level 1 Level 2 Level 3 Total

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

Assets

• Loans and advances to banks

• Loans and advances to

customers


• Positive fair values from

derivative financial instruments

(hedge accounting)


• Non-current assets or disposal

groups classified as held for sale

–

–

754

–

10,735

–

–

–

587

–

10,740

–

–

297

18,229

1,447

16,432

–

3

703

16,1731

1,527

17,292

3

–

11

630

–

479

53

–

12

5841

–

477

151

–

307

19,613

1,447

27,646

53

3

715

17,343

1,527

28,509

155

Total 11,489 11,326 36,405 35,701 1,173 1,225 49,067 48,252

Liabilities





• Negative fair values from

derivative financial instruments

(hedge accounting)

• Subordinated capital

–

–

275

259

–

–

–

–

228

220

–

–

252

3,656

3,730

12,313

1,570

48

236

3,773

3,625

12,0461

1,354

46

–

–

–

12

–

–

–

–

–

201

–

–

252

3,656

4,006

12,584

1,570

48

236

3,773

3,852

12,286

1,354

46

Total 535 448 21,569 21,081 12 20 22,115 21,548



Fair values calculated on the basis of unobservable market data (Level 3) by risk type

EUR million

Interest rate

risks Currency risks

Equity and

other price risks Total

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

Assets

• Loans and advances to

customers



• Non-current assets or disposal

groups classified as held for

sale

11

579

–

–

12

565

–

–

–

24

–

–

–

171

–

–

–

28

479

53

–

1

477

151

11

630

479

53

12

584

477

151

Total 589 577 24 17 559 630 1,173 1,225

Liabilities

• Liabilities held for trading – – 12 191 – – 12 20

Total – – 12 19 – – 12 20


Reclassifications between Levels 1 and 2

Reclassifications

EUR million

to Level 1 from Level 2 to Level 2 from Level 1

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

1 Jan –

30 Jun 2016

1 Jan –

30 Jun 2015

Assets



37

2,170

32

608

8

2,134

60

871

Total 2,207 640 2,141 931

Liabilities



177

61

83

25

174

25

18

7

Total 238 108 199 24

In the reporting period, financial instruments were reclassified between Level 1 and Level 2, as

they will be measured again/will no longer be measured using prices quoted on active markets.

The amounts reclassified were calculated on the basis of the fair value at the end of the reporting

period.





Changes in fair value calculated on the basis of unobservable market data (Level 3) – assets

EUR million

Loans and

advances to

customers

Assets held for

trading

Positive fair

values from

derivative

financial

instruments

(hedge

accounting)

Financial

investments

Non-current

assets

or disposal

groups

classified as

held for sale Total

2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015

As at 1 Jan 12 18 584 766 – 1 477 514 151 40 1,225 1,339

Currency-related changes – – 16 9 – – – 2 – – 16 11


consolidation – – – – – – – 3 – – – – 3 –

Income and expenses recognised

in the income statement – – 58 – 27 – – 1 – 1 – 4 – – 57 – 32

Changes in the revaluation surplus – – 1 – – – – 5 5 15 – 20 4

Purchases – – 6 – – – 21 1 – – 27 1

Sales 1 2 3 29 – – 15 10 142 16 162 56

Settlements – – – – – – – – – – – –

Reclassifications to Level 3 from

Levels 1 and 2 – – 56 23 – – – – – – 56 23

Reclassifications from Level 3 to

Levels 1 and 2 – – 149 150 – – – – – – 149 150

Transfers/other changes – – 64 32 – – – 6 – 29 – 87 32

As at 30 Jun 11 15 630 624 – – 479 508 53 24 1,173 1,171

Income and expenses recognised

in the income statement during

the period for financial

instruments held at 30 June – 1 – 1 56 30 – – – 1 – 4 – – 55 25


Changes in fair value calculated on the basis of unobservable market data (Level 3) – liabilities

EUR million

Liabilities held for trading Total

2016 2015 2016 2015

As at 1 Jan 20 34 20 34

Currency-related changes 11 15 11 15

Income and expenses recognised in the income

statement – 28 41 – 28 41

Reclassifications to Level 3 from Levels 1 and 2 1 1 1 1

Reclassifications from Level 3 to Levels 1 and 2 55 110 55 110

Transfers/other changes 63 32 63 32

As at 30 Jun 12 13 12 13

Income and expenses recognised in the income

statement during the period for financial

instruments held at 30 June – 27 54 – 27 54

The income and expenses recognised in the income statement are shown under the gains or

losses on fair value measurement item if they are not measurement gains or losses from hedge

accounting (recognised in gains or losses on hedge accounting), impairments of financial invest-

ments in the available-for-sale category (recognised in gains or losses on financial investments)

or writedowns of receivables in the available-for-sale category (recognised in other income and

expenses). Changes in the revaluation surplus are a component of other comprehensive income.

Non-observable inputs were assessed for materiality at the end of the reporting period based on

their fair value. As a result financial instruments were reclassified to Level 3 from Level 2 and

from Level 3 to Level 2.

The models used to calculate fair value must conform with recognised financial valuation meth-

ods and take account of all factors market participants would consider reasonable when setting

a price. Within the BayernLB Group, the models used, including any major changes, are reported

to the Board of Management for approval mainly by Group Risk Control and Group Strategy in

the form of a separate resolution or as part of their regular reporting. All calculated fair values

are subject to internal controls and are independently checked or validated by risk-control units

and the units with responsibility for equity interests in accordance with the dual control principle.

The procedures used for this are contained in the guidelines approved by the Board of Manage-

ment for the BayernLB Group. Fair values are reported on a regular basis to the management of

the divisions concerned and to the Board of Management.

One financial instrument with an embedded derivative structure is allocated to Level 3 of the fair

value hierarchy. This financial instrument is in an economic hedge with the associated hedging

derivative. As at 30 June 2016, the sensitivity of this package to changes in key factors was

• for a ten-basis point upward (downward) shift in the euro yield curve:

EUR – 0.1 million (EUR +0.1 million) (31 December 2015: EUR – 0.1 million (EUR +0.1 million)),

• for a ten-basis-point upward (downward) movement in the measurement spread:






Other derivative financial instruments whose significant inputs for measuring fair value are

not observable on the market are also allocated to Level 3 of the fair value hierarchy. As at

30 June 2016, the sensitivity of these financial instruments to changes in key factors was:

• for a 10-percentage-point upward (downward) movement in expected loss given default:

EUR – 0.4 million (EUR +0.6 million) (31 December 2015: EUR – 1.1 million (EUR +2.0 million))1,

• for a one notch improvement (deterioration) in the ratings:

EUR +0.1 million (EUR – 0.1 million) (31 December 2015: EUR +1.6 million (EUR – 0.9 million))1.

Also receivables secured by real estate that were purchased on the non-performing loan market

were allocated to Level 3 of the fair value hierarchy as there was no current market activity in

these or similar loans and advances. As at 30 June 2016, the sensitivity of these real estate

secured receivables to changes in key factors was:

• for a 5-basis-point upward (downward) movement in the realisable value:

EUR 0.5 million (EUR – 0.5 million) (31 December 2015: EUR +0.6 million (EUR – 0.6 million)),

• for a 6-month extension (reduction) in the realisation period:

EUR – 0.1 million (EUR 0 million) (31 December 2015: EUR 0 million (EUR 0 million)).

For the acquisition of its shares in Visa Europe Limited, London by Visa Inc., San Francisco on

21 June 2016, the BayernLB Group received a payment in cash, the right to further payments in

future and preference shares in Visa Inc., San Francisco. The fair value of the preference shares is

determined by the market price of Visa Inc. common stock and potential risks from legal disputes.

A conversion ratio of 50 percent was therefore used to calculate the fair value. As at 30 June 2016,

the sensitivity of this financial instrument to changes in key factors was

• for a 10-basis point increase (decrease) in the conversion ratio:

EUR +1.9 million (EUR – 1.9 million) (31 December 2015: EUR +2.1 million (EUR – 2.1 million)).

As at 30 June 2016, the sensitivity of equity interests whose fair value is calculated using the

German income method (Ertragswertverfahren) to changes in key factors was

• for a 25-basis-point upward (downward) movement in the base interest rate:


• for a 25-basis-point upward (downward) movement in the market risk premium:


The underlying base interest rate moved within a range of 0.75 – 1.25 percent (average: 1.0 percent)

(31 December 2015: 1.25 – 1.75 percent (average: 1.5 percent)), while the underlying market risk

premium moved within a range of 6.25 – 6.75 percent (average: 6.5 percent) (31 December 2015:

6.25 – 6.75 percent (average: 6.5 percent)).



(40) Financial instruments designated at fair value through profit or loss

The maximum default risk for loans and receivables in the fair value option category was

EUR 297 million on the reporting date (31 December 2015: EUR 706 million). Rating-related

changes in the fair value of these financial assets in the reporting period amounted to EUR 0 million

(30 June 2015: EUR 0 million), and since designation EUR 4 million (30 June 2015: EUR 9 million).

For financial liabilities under the fair value option, credit-rating driven fair value changes in

the reporting period amounted to EUR – 15 million (30 June 2015: EUR 7 million), and since desig-

nation EUR – 47 million (30 June 2015: EUR – 109 million). The difference between the carrying

amount of the financial liabilities and the redemption amount at maturity was EUR 682 million

on the reporting date (31 December 2015: EUR 695 million).

The change in fair value caused by changes in ratings was calculated by taking the difference

between the fair value based on the credit spreads at the end of the reporting period and the fair

value based on the credit spreads at the beginning of the reporting period.

(41) Derivative transactions

The table below shows interest rate and foreign currency-related derivatives and other forward

transactions and credit derivatives still open at the end of the reporting period. Most were con-

cluded to hedge fluctuations in interest rates, exchange rates or market prices or were trades for

the account of customers.

EUR million

Nominal value Positive fair value Negative fair value

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

30 Jun

2016

31 Dec

2015

Interest rate risks 893,243 904,342 30,566 23,2261 30,426 23,0901

Currency risks 117,829 120,021 3,124 2,8711 3,205 3,5861

Equity and other price risks 5,009 4,871 487 555 350 545

Credit derivative risks 880 920 1 1 1 2

Total 1,016,961 1,030,154 34,179 26,653 33,983 27,223

of which:

Derivatives for trading purposes 853,373 884,686 27,291 22,2581 27,458 22,4511






Supplementary information

(42) Trust transactions


Assets held in trust

• Loans and advances to banks

• Loans and advances to customers

• Other assets

5,002

37

4,965

1

5,044

43

5,000

1

Liabilities held in trust




5,002

13

4,989

1

5,044

12

5,031

1

(43) Contingent assets, contingent liabilities and other commitments


Contingent liabilities

• Liabilities from guarantees and indemnity agreements

• Other contingent liabilities

9,963

9,939

24

10,228

10,193

35

Other liabilities

• Placement and underwriting commitments

• Irrevocable credit commitments

21,956

23

21,933

21,484

26

21,458

Total 31,919 31,712

As at the reporting date there were also contingent assets from income taxes in the double-digit

million range and contingent assets from legal disputes where the Bank considers an inflow of

economic benefits that cannot be reliably estimated at present to be probable.


(44) Administrative bodies of BayernLB

Supervisory Board

Gerd Haeusler

Chairman of the BayernLB Supervisory Board

Munich

Walter Strohmaier

Deputy Chairman of the BayernLB

Supervisory Board

Chairman of the Board of Directors

Sparkasse Niederbayern-Mitte

Straubing

Dr Hubert Faltermeier

Chief District Administrator

Kelheim

Dr Roland Fleck

Managing Director

NürnbergMesse GmbH

Nuremberg

Dr Ute Geipel-Faber

Senior Advisor

Invesco Real Estate GmbH

Munich

Ralf Haase

until 31 July 2016

Chairman of the General Staff Council

BayernLB until 31 July 2016

Munich

Dr Ulrich Klein

Under Secretary

Bavarian State Ministry of Finance,

Regional Development and Regional Identity

Munich

Dr Thomas Langer

Under Secretary

Bavarian State Ministry for Economic Affairs

and the Media, Energy and Technology

Munich

Wolfgang Lazik

Deputy Secretary

Bavarian State Ministry of Finance,

Regional Development and Regional Identity

Munich

Professor Dr Christian Rödl

Managing Partner

Rödl & Partner GbR

Nuremberg

Professor Dr Bernd Rudolph

LMU Munich and Steinbeis-Hochschule Berlin





Board of Management (including allocation of tasks)

Dr Johannes-Jörg Riegler

CEO

Corporate Center

Deutsche Kreditbank Aktiengesellschaft

Dr Edgar Zoller

Deputy CEO

Real Estate & Savings Banks/Association

Bayerische Landesbodenkreditanstalt1

Marcus Kramer

CRO

Risk Office

Restructuring Unit

Group Compliance

Michael Bücker


Dr Markus Wiegelmann

CFO/COO

Financial Office

Operating Office

Ralf Woitschig

Financial Markets

BayernInvest Kapitalverwaltungsgesellschaft mbH

Real I.S. AG Gesellschaft für Immobilien

Assetmanagement

1 Dependent institution of the Bank


(45) Related party disclosures

The BayernLB Group maintains business relationships with related parties. These include the

Free State of Bavaria and the Association of Bavarian Savings Banks, Munich (SVB), whose indirect

stakes in BayernLB are 75 percent and 25 percent respectively, non-consolidated subsidiaries,

joint ventures and associates. The members of BayernLB’s Board of Management and Supervisory

Board and their close family members, and companies controlled by these parties or jointly con-

trolled if these parties are members of their management bodies are also deemed related parties.

Relationships with the Free State of Bavaria


Loans and advances 4,891 5,261

Assets held for trading 292 141


Liabilities 1,286 83

Liabilities held for trading 12 13

Subordinated capital – 1,300

Liabilities held in trust 4,636 4,663

Contingent liabilities 4 4

Other liabilities 1,065 965

The following were material relationships with companies controlled by the Free State of Bavaria,

or which it jointly controls or has significant influence over:


Loans and advances to banks 21 32

Loans and advances to customers 244 277

Risk provisions – 1



Liabilities to banks 3,011 2,912

Liabilities to customers 79 53

Securitised liabilities 129 129

Liabilities held for trading 4 4

Assets held in trust 396 396





Relationships with the Association of Bavarian Savings Banks


Liabilities 94 98

Relationships with investees


Loans and advances to customers 373 401

Risk provisions 73 67



Other assets 8 4

Liabilities to customers 124 126

Securitised liabilities – 2

Provisions 1 2

Other liabilities – 1

Contingent liabilities 15 15

Other liabilities 12 7

In the reporting period, an expense of EUR 22 million (30 June 2015: EUR 5 million) was recognised

for non-recoverable or doubtful receivables.

In the reporting period, capital contributions were made to unconsolidated entities, joint ven-

tures and associates in the amount of EUR 0 million (H1 2015: EUR 3 million). These investees

repaid capital in the amount of EUR 15 million (H1 2015: EUR 20 million).

(46) Events after the reporting period

The following events of major significance to the BayernLB Group occurred after 30 June 2016:

On 29 July 2016,the European Banking Authority (EBA) published the results of its EU-wide

stress test. In the baseline scenario, the BayernLB Group achieved a “fully loaded” CET1 ratio of

12.4 percent at the end of 2018 and in the adverse scenario a CET1 ratio of 8.3 percent. With a

3.7 percent decline in its capital ratio, the BayernLB Group was close to the average of all the

banks the EBA tested.

No other events of major significance have occurred since 30 June 2016.


Responsibility statement by the Board of Management

To the best of our knowledge and in accordance with the applicable reporting principles for

half-yearly financial reporting and generally accepted accounting standards, the consolidated

half-yearly financial statements give a true and fair view of the financial performance and financial

position of the Group, and the Group interim management report includes a fair review of the

development and performance of the business and the position of the Group, together with a

description of the principal opportunities and risks associated with the expected development

of the Group in the remainder of the financial year.

Munich, 16 August 2016

Bayerische Landesbank

The Board of Management

Dr Johannes-Jörg Riegler Dr Edgar Zoller Marcus Kramer

Michael Bücker Dr Markus Wiegelmann Ralf Woitschig





Review Report

To Bayerische Landesbank, Munich

We have reviewed the condensed consolidated half-yearly financial statements – comprising the

condensed statement of comprehensive income (including income statement), the balance sheet,

the statement of changes in equity, the condensed statement of cash flows and selected explana-

tory notes – and the Group interim management report of Bayerische Landesbank for the period

from 1 January 2016 to 30 June 2016 which are part of the half-yearly financial report pursuant

to section 37w para. 2 WpHG (“Wertpapierhandelsgesetz”: German Securities Trading Act). The

preparation of the condensed consolidated half-yearly financial statements in accordance with

the International Financial Reporting Standards (IFRS) applicable to half-yearly financial reporting

as adopted by the EU and of the Group interim management report in accordance with the

requirements of the German Securities Trading Act applicable to group interim management

reports is the responsibility of the legal representatives of the company. Our responsibility is to

issue a review report on the condensed consolidated half-yearly financial statements and on the

Group interim management report based on our review.

We conducted our review of the condensed consolidated half-yearly financial statements and

of the Group interim management report in accordance with the German generally accepted

standards for the review of financial statements promulgated by the Institut der Wirtschaftsprüfer

(Institute of Public Auditors in Germany) (IDW). Those standards require that we plan and per-

form the review so that we can preclude through critical evaluation, with a certain level of assur-

ance, that the condensed consolidated half-yearly financial statements have not been prepared,

in all material respects, in accordance with the IFRS applicable to half-yearly financial reporting

as adopted by the EU or that the Group interim management report has not been prepared, in

all material respects, in accordance with the requirements of the German Securities Trading Act

applicable to Group interim management reports. A review is limited primarily to inquiries of

company personnel and analytical assessments and therefore does not provide the assurance

attainable in a financial statement audit. Since, in accordance with our engagement, we have not

performed a financial statement audit, we cannot issue an auditor’s report.

Based on our review, no matters have come to our attention that cause us to presume that the

condensed consolidated half-yearly financial statements have not been prepared, in all material

respects, in accordance with the IFRS applicable to half-yearly financial reporting as adopted

by the EU or that the Group interim management report has not been prepared, in all material

respects, in accordance with the requirements of the German Securities Trading Act applicable

to Group interim management reports.

Munich, 16 August 2016

Deloitte GmbH

Wirtschaftsprüfungsgesellschaft

(Löffler) (Apweiler)

German public auditor German public auditor

(Wirtschaftsprüfer) (Wirtschaftsprüfer)


Bayerische Landesbank

Brienner Strasse 18

80333 Munich

Germany

www.bayernlb.com

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